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Income Tax Appellate Tribunal, “K” Bench, Mumbai
O R D E R Per B.R. Baskaran (AM) :-
These are cross appeals directed against the order dated 20.12.2013 passed by the Assessing Officer for A.Y. 2009-10 under section 143(3) read with section 144C(13) of the I.T. Act in pursuance of direction given by learned Dispute Resolution Panel (DRP).
Grounds of appeal urged by the assessee give rise to following issues :- a) Addition relating to transfer pricing adjustment b) Disallowance made under section 40(a)(ia) of the Act
2 Frost & Sullivan (India) Pvt. Ltd. c) Addition relating to credit card expenses d) Disallowance of claim of bad debts
The assessee is a group company of Frost and Sullivan, New York, USA. The parent company is primarily engaged in the business of providing market analysis and consulting services to its clients. The assessee herein is carrying on its business in India through two divisions, viz., (a) Consulting practice division (CP Division) (b) Global Innovation Centre Division (GIC Division).
The CP Division provides “market analysis and consulting services” to its local and foreign clients apart from providing similar services to its Associate Enterprise (AE). The GIC Division operates as ‘back office support centre’ for its AE providing back office business support services.
The assessee benchmarked international transactions separately for CP division and GIC division. The Company claimed before the Transfer Pricing Officer (TPO) that it has adopted CUP method for benchmarking CP division. However, the TPO noticed that transfer pricing study has been done under ‘Transaction net margin’ method only, though it was claimed that that international transactions of CP division was bench marked under CUP method. The TPO rejected transfer pricing study of the assessee and proceeded to determine arms length price of the international transaction by aggregating transactions of both divisions cited above. The TPO selected sixteen comparables and determined arithmetical mean of Profit Level Indicator (PLI) as 25.03%. The Profit level indicator was taken as Operating profit/Total cost. The TPO allowed deduction for working capital adjustment/risk difference to the extent of 3.60%. Accordingly he determined arms length margin (OP/TC) at 21.43% and proposed adjustment of Rs. 7,11,54,249/-. It is pertinent to note that TPO had made transfer pricing adjustment at the entity level in respect of all transactions (both AEs and non- AEs).
3 Frost & Sullivan (India) Pvt. Ltd.
The Learned DRP gave partial relief to the assessee by directing the TPO to restrict the transfer pricing adjustment to “international transactions with AE” only. In view of the direction so given by learned DRP, transfer pricing adjustment came to be reduced to Rs. 3,78,18,466/-. The Assessing Officer accordingly, passed assessment order making addition of Rs. 3.78 crore referred above. Besides the above the Assessing Officer also made additions towards section 40(a)(ia) of the Act and towards the difference in credit card expenses between the books and AIR statement. The assessee had made a new claim for deduction bad debts under section 36(1)(vii) of the Act before learned DRP, but the same was rejected by learned DRP.
Aggrieved by the assessment order passed by the Assessing Officer/TPO, both the parties have filed this appeal before the Tribunal.
We shall take up the appeal filed by the assessee first. The first issue relates to transfer pricing adjustment made by the TPO. The Learned AR contended that the TPO was not right in aggregating both the CP division and GIC division and according determining transfer pricing adjustment. The Learned AR reiterated that CP division provides market analysis and consulting services; while GIC division provides low end back office support services to its AE. Under the CP division, the assessee is providing services to both the AE and non-AEs, while in GIC division, the assessee is providing back end support services only to its AE. Accordingly, learned AR contended that both the divisions should not have been aggregated by the TPO.
The Learned AR further submitted that in A.Y. 2010-11, learned DRP has accepted that the assessee was justified in applying CUP method for benchmarking international transaction of CP division, meaning thereby, the learned DRP has indirectly accepted that both the divisions have to be benchmarked separately. Further, the TPO himself has accepted above said claim of the assessee in A.Y. 2011-12, 2012-13 & 2013-14. Accordingly,
4 Frost & Sullivan (India) Pvt. Ltd. learned AR submitted that, consistent with the view taken by the TPO from A.Y. 2011-12 onwards, the Tribunal may be pleased to direct the TPO to bench mark the transactions in CP divisions and GIC division separately.
We have heard learned Departmental Representative on this issue and perused the record. We noticed that learned DRP itself has accepted that Arms length price of international transactions entered under CP division with the AE, meaning thereby, the DRP itself has accepted the claim of the assessee in AY 2010-11 that the CP division should be benchmarked separately. The Ld A.R fairly admitted that the revenue has not accepted the above said direction given by Ld DRP and it has filed appeal before the Tribunal. Be that as it may, we notice that, from A.Y. 2011-12 onwards, the TPO himself has accepted the contention of the assessee and examined ALP of international transactions entered with AEs in CP division and GIC division separately. It is the also the contention of Learned AR that the assessee is providing market analysis and consulting services under CP divisions to both AEs as well as non-AEs, while back end office support services are provided to its AE only under GIC division. This fact, in our view, supports the claim of the assessee that it is operating CP division separately. Under these set of facts, we are of the view that there is merit in the contention of the assessee that the CP division and GIC division should be benchmarked separately.
Since the TPO has not benchmarked the transaction in CP division separately, in our view, the transactions of CP division requires to be benchmarked separately in accordance with law by the TPO. Accordingly, we restore the issue relating to benchmarking of CP division separately to the file of the Assessing Officer/TPO.
With regard to the GIC division, the bench pointed out that the same is also required to be restored to the file of TPO, since it also requires benchmarking separately. The Learned AR submitted that he has no objection for the same, but pleaded that certain comparable companies selected by the 5 Frost & Sullivan (India) Pvt. Ltd.
TPO are not good comparables and his submission is supported by the decisions rendered by the High Courts and Tribunals. Accordingly, he prayed that the Tribunal may render the decision on those comparables, so that this issue could also be settled at the end of TPO.
Explaining further, the Ld A.R submitted that the assessee had selected ten comparable companies for GIC division in its Transfer pricing study. However, the TPO has added six more companies to the list. The Learned AR submitted that the assessee is contesting inclusion of following five companies out of the above said six comparable companies :-
i) Accentia Technologies Ltd. ii) Acropetal Technologies Ltd. iii) Coral Hub Limited iv) Eclerx Services Ltd. v) Genesys International Corporation Ltd.
The Learned AR submitted that, if the above said five companies are excluded from the list, then international transaction entered by the assessee with its AE in GIC division would be at arm’s length. The Learned AR submitted that all these five companies have been held to be not good comparable companies by the decisions rendered by Hon'ble High Court and Tribunal. The Learned AR also invited our attention to the relevant decisions in support of his submission.
We have heard learned Departmental Representative on this issue and perused the records. The Learned Departmental Representative primarily contended that, under TNMM method, comparable companies are selected in a broad manner and hence comparable companies selected by the TPO do not require any disturbance.
We noticed that the above said five companies have been held to be not good comparable companies in the decision relied on by learned AR. For the 6 Frost & Sullivan (India) Pvt. Ltd.
sake of convenience we extract below the decision rendered by Hon'ble High Court/Tribunal in respect of each of the above said comparable companies.
(A) ACCENTIA TECHNOLOGIES LTD:-
The Hon’ble Bombay High Court, in the case of PCIT vs. PTC Software (I) P Ltd (101 taxmann.com 117), has held this company as not a good comparable company for captive ITES provider. The relevant discussions made by the Hon’ble jurisdictional Bombay High Court are extracted below:- “5.Re. Question (c):— (i) The impugned order of the Tribunal has excluded M/s. Accentia Technologies Ltd., from the list of comparables to determine the ALP of the Respondent's transactions. (ii) The impugned order renders a finding of fact that the nature of activities carried out by M/s. Accentia Technologies Ltd., are different from that carried out by Respondent. M/s. Accentia Technologies Ltd., developes its own software and rendered Medical transcription services while the Respondent is providing BPO Services. Besides, the impugned order of the Tribunal held that high profit margins of M/s. Accentia Technologies Ltd., was attributable to amalgamation which took place in the previous years relevant to subject Assessment Year. Therefore, not comparable. (iii) In fact, this Court in Pr. CIT v. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 has upheld the view of the Tribunal in not accepting the Accentia Technologies Ltd., as comparable, inter alia, on account of fact that extra ordinary event such as merger/ amalgamation would affect the profitability of M/s. Accentia Technologies Ltd., Thus, making it incomparable. (iv) Further, in that case, as in this case, the Tribunal has also recorded a finding of fact that the activities of M/s. Accentia Technologies Ltd., and the Respondent are different. Thus, not comparable. The above finding of fact is not shown to be perverse. (v) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.” (B) ACROPETAL TECHNOLOGIES LIMITED:-
This company has been held to be a not good comparable company by Hyderabad bench of Tribunal in the case of Excellence Data Research (P) Ltd vs. ITO (2014)(49 taxmann.com 409). The relevant observations made by the Hyderabad bench of Tribunal are extracted below:-
7 Frost & Sullivan (India) Pvt. Ltd.
“(5) Acropetal Technologies Ltd. (Seg.) 18. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra- ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) (P.) Ltd.(supra) and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is not proper. 18.1 After considering the rival contentions, we agree with the objections raised by assessee. As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end, by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engg. (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company.”
(C) CORAL HUB LIMITED:-
The Hon’ble Bombay High Court, in the case of PCIT vs. PTC Software (I) P Ltd (101 taxmann.com 117), has held this company as not a good comparable company for captive ITES provider. The relevant discussions made by the Hon’ble jurisdictional Bombay High Court are extracted below:-
4.Re. Question (c): (I) Vishal Information Technology Ltd., (now known as Coral Hubs Ltd.:— (i) The impugned order of the Tribunal held that it is to be excluded from the list of comparables to determine the ALP of the Respondent. This, by following its order dated 30th April, 2014 in the Respondent-Assessee's own case for the Assessment Years 2006-07 and 2007-08. It was so held as functionally Vishal Information Technologies Ltd., outsources the services to be rendered by it to third party - vendors while the Respondent itself rendered services to its Associated Enterprise (AE) and did not outsource its services.
8 Frost & Sullivan (India) Pvt. Ltd.
(ii) Mr. Suresh Kumar, learned Counsel for the Respondent-Revenue very fairly states that being aggrieved by the two orders dated 30th April, 2014 for the Assessment Years 2006-07 and 2007-08 in the case of the same Respondent-Assessee, it had preferred appeals to this Court being PTC Software (I) (P.) Ltd.'s case (supra) and Income Tax Appeal No. 337 of 2014 CIT v. PTC Software (I) (P.) Ltd., Both the appeals by the Revenue had challenged the exclusion of the Vishal Information Technologies Ltd., as a comparable, were dismissed by orders dated 10th October, 2016 (Assessment Year 2006-07) and 26th September, 2016 (Assessment Year 2007-08), as not giving rise to any substantial question of law. No distinguishing features have been pointed out for the subject Assessment Year from that prevailing in Assessment Years 2006-07 and 2007-08 which would warrant a different view. (iii) Thus, sub-question (I) as proposed does not give rise to any substantial question of law. Thus, not entertained.
(D) E CLERX SERVICES LIMITED:-
The Hon’ble Bombay High Court, in the case of PCIT vs. PTC Software (I) P Ltd (101 taxmann.com 117), has held this company as not a good comparable company for captive ITES provider. The relevant discussions made by the Hon’ble jurisdictional Bombay High Court are extracted below:- “6.Re. Question (d):— (i) The impugned order of the Tribunal held that Eclerx Services Ltd., is not a comparable to the Respondent-Assessee for the reasons that it was providing knowledge process outsourcing (KPO) - whereas Respondent is engaged in BPO Services. (ii) The impugned order of the Tribunal place reliance upon the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT [2014] 43 taxmann.com 100/147 ITD 83 (Mum. - Trib.), to hold that Eclerx Services Ltd., was engaged in providing KPO Services which is distinct from the BPO Services. Thus, excluded the same from the list of comparables. (iii) The impugned order of the Tribunal, in fact, relies upon the following extract in the Special Bench's decision of the Tribunal in Maersk Global Centres (India) (P.) Ltd.'s case (supra) as under:- "Keeping in view the nature of services rendered by M/s. Eclerx Services Pvt. Ltd., and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns." (iii) Although both are providing ITES services, by virtue of that alone, both units will not 9 Frost & Sullivan (India) Pvt. Ltd. become comparable as observed by this Court in Aptara Technology (P.) Ltd.'s case (supra) rendered on 26th March, 2018 - as follows:- 'merely because the tested party and the comparable provide ITES, they do not become comparable. The content of the services rendered by virtue of IT is to be examined before holding it to be comparable.' (iv) Further, our attention is invited to the decision of the Delhi High Court in Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573/377 ITR 533 wherein Delhi High Court held that KPO services could not be compared to call centre services, although both would fall under the umbrella of ITES. Therefore, the functions of two cannot be considered to be similar for the purpose of being comparable. (v) In the above view, this question also does not give rise to any substantial question of law. It is essentially a finding of fact which is not shown to be perverse. Thus, not entertained.”
(E) GENESYS INTERNATIONAL CORPORATION LIMITED:-
This company has been held to be not a good comparable in case of captive ITES service provider by Hon’ble Punjab & Haryana High Court in the case of CIT vs. Mercer Consulting (India) P Ltd (2016)(76 taxmann.com 153). The relevant observations made by Hon’ble Punjab & Haryana High Court are extracted below:-
“Re: Genesys International Corporation Ltd.
23. This case was also initially included in the list of seven cases submitted by the assessee but was later sought to be excluded. The TPO, however, included the same. The assessee challenged the inclusion successfully before the Tribunal.
24. The assessee provides various services to the customers of its AEs in relation to human resources which relate to the employees of the prospective clients. Genesys International Corporation Ltd. on the other hand provides a full range of geospatial services to its clients. Geospatial services relate to the relative position of things on the earth's surface. This includes 3D mapping, navigation maps, image processing and cadastral mapping etc. The two services are entirely different and therefore cannot be compared for the purpose of determining the ALP.
25. The TPO relied upon a CBDT circular dated 26.09.2000 which furnishes a list of products or services that may be considered as Information Technology Enabled Products/Services (ITES) for the purpose of sections 10-A and 10-B of the Income Tax Act, 1961. The circular enumerates fifteen categories. As rightly observed by the Tribunal these categories refer to products and services which are entirely different in description and functions. The manufacture of such products and the provision of such services also have entirely different financial requirements and consequences. The instances cited by the Tribunal are apposite. Geographical Information Systems Services
10 Frost & Sullivan (India) Pvt. Ltd. and the assessee's services are included in the circular and therefore, fall within the category of ITES. It does not follow that they are comparable to each other for the purpose of determining the ALP in respect of the assessee's international transactions. The circular is issued for entirely different reasons viz to enable an assessee to avail deductions in respect of certain activities. The sections do not contemplate or even remotely indicate that the activities referred to therein are comparable to each other. Much less do these provisions indicate that the activities included therein have any relevance to the transfer pricing mechanism for the purpose of determination of the ALP of international transactions.
26. The Tribunal rightly rejected this case from the list of comparables.”
Following the above said decisions, we hold that all the above said five companies cannot be considered as comparable companies to the GIC division providing back office support services. Accordingly we direct the Assessing Officer/TPO to not include these five companies while determining ALP of international transactions of GIC division. With these observations, we set aside the issue of determining ALP of international transaction in GIC division.
It is pertinent to mention here that though the assessee has raised many grounds in respect of comparable companies, learned AR restricted his arguments on exclusion of above said five companies only. Accordingly, all other grounds relating to TP adjustment in GIC division are dismissed as not pressed.
Next ground urged by the assessee relates to disallowance made under section 40(a)(ia) of the Act.
Learned AR submitted that the assessee had suo moto disallowed the sum of Rs. 21,70,496/- under section 40(a)(ia) of the Act, which was also reported in Clause 17(f) of the tax audit report. The above said amount consisted of two disallowances namely Rs. 16,01,092/- and Rs. 5,69,404/-. In the Tax audit report, the above said amount of Rs. 16,01,092/- was again reported in Clause 27(b)(i) of the tax audit report and hence it was disallowed again under section 40(a)(ia) of the Act. Hence, it has resulted in double
11 Frost & Sullivan (India) Pvt. Ltd. disallowance of the same item. The Learned AR submitted that the learned DRP appreciated the contentions of the assessee and accordingly directed the Assessing Officer to verify the claim of the assessee. The Learned AR submitted that the Assessing Officer, while passing final assessment order, has accepted the fact that there was double disallowance as contended by the assessee. However, while giving relief, the AO has reduced the amount of Rs.16,01,092/- from the “income from STPI unit”. The Ld AR submitted that the above said disallowance actually relates to non-STPI unit and hence the same should have been reduced from non-STPI unit. Accordingly he submitted that the issue may be restored to the file of the Assessing Officer so that double disallowance may be removed from non-STPI unit.
We have heard learned Departmental Representative on this issue. Since the claim of the assessee requires verification, we restore this issue to the file of Assessing Officer to examine the claim that this disallowance pertains to non-STPI unit. After carrying out due verification, the AO may take decision in accordance with law. Needless to mention the Assessing Officer should eliminate double disallowance from the concerned unit only.
Next issue relates to addition of Rs. 61,215/-on account of unreconciled entry relating to credit card expenses appearing in AIR statement. The AO noticed that there was difference in the amount of credit card expenses between the books of accounts and AIR statement. Hence the Assessing Officer disallowed the difference, since the assessee did not furnish relevant details. The Learned DRP also confirmed the same. The Learned AR submitted that the assessee may be provided with an opportunity to explain its case before the Assessing Officer and furnish the details. Accordingly, in the interest of natural justice, we restore this issue to the file of the Assessing Officer for examining it afresh. If the assessee is not able to furnish the details to the satisfaction of the Assessing Officer, then the Assessing Officer is free to take appropriate decision in accordance with the law.
12 Frost & Sullivan (India) Pvt. Ltd.
21. The last issue contested by the assessee relates to rejection of claim for bad debts written off by the assessee. The Learned AR submitted that the assessee had created provision for bad debts to the extent of Rs. 14,96,261/- in A.Y. 2008-09 and had voluntarily disallowed the same while computing total income of that year. During the year under consideration the assessee wrote off a sum of Rs. 8,74,282/- as bad debts and debited the same to the “Provisions for bad debts” account. The Ld A.R submitted that the amount so written off is allowable as deduction, even though the same was not debited to the profit and loss account and hence the assessee should have claimed the same as deduction u/s 36(1)(vii) of the Act while computing total income. The Ld A.R submitted that the assessee has inadvertently omitted to claim it while computing total income. However, before learned DRP the assessee put up a claim for deduction of Rs. 8,74,282/- as bad debts under section 36(1)(vii) of the Act. However, learned DRP rejected the claim stating that new claim can be made only by way of filing revised return of income as held by Hon'ble Supreme Court in the case of Goetz (India) Ltd. (284 ITR 323). The Learned AR submitted that the claim put forth by the assessee is a genuine claim allowable as deduction u/s 36(1)(vii) of the Act. Accordingly, he prayed that this claim of the assessee may be admitted by the Tribunal and the Assessing Officer may be directed to allow the same.
22. We heard learned Departmental Representative on this issue and perused the record. The Hon'ble Supreme Court in the case of Goetz (India) Ltd. (supra) has held that its order does not impeach the power of the Tribunal to entertain additional claims. It is the submission of the assessee that the provision of bad debts created in A.Y. 2008-09 was disallowed voluntarily and during the year under consideration, the amount of bad debts actually written off was debited to the “Provisions of bad debts account”. It is the contention of Ld A.R that the amount so written off as bad debts against the debtors account is allowable as deduction under section 36(1)(vii) of the Act. Since the claim of the assessee appears to be in accordance with the law and since it
13 Frost & Sullivan (India) Pvt. Ltd. is the duty of the AO to determine correct total income, we admit the above said additional claim of the assessee.
However, the deduction claimed under section 36(1)(vii) can be allowed, if the assessee has complied with the provisions of sec. 36(2) of the Act. Hence this claim of the assessee, in our view requires verification at the end of AO. Accordingly, we restore this issue to the file of the Assessing Officer for examining it in accordance with law.
We shall now take up the appeal filed by the Revenue. The only issue urged by the revenue is related to the direction given by Ld DRP to restrict the Transfer pricing adjustment to the international transactions entered with the AEs of the assessee. We noticed earlier that the TPO had determined the transfer pricing adjustment at entity level. When this was objected to by the assessee, the Ld DRP gave following direction:- “…..However considering the series of ITAT decisions on this issue, the TPO is directed to benchmark the profitability at entity level and work out the ALP adjustment at the transaction level and not at entity level as worked out in the order.”
We heard the parties on this issue and perused the record. We notice that the direction so given by Ld DRP gets support from the decision rendered Pune bench of Tribunal in the case of Ognibene India (P) Ltd vs. DCIT (2019)(111 taxmann.com 380)(Pune) and the relevant observations are extracted below:- 19. The solitary issue raised in the above grounds relates to the manner of quantification of adjustments i.e. restricting to the value of international transactions only and not to the all transactions at the entity level. 20. At the outset, ld. AR for the assessee brought our attention to the decision of this Tribunal in the case of Hyundai Construction Equipment India (P.) Ltd. v. Dy. CIT [2019] 106 taxmann.com 197 (Pune - Trib.) and relied on the contents of para 25 to 28 of the said order of the Tribunal. In the said decision, the Tribunal granted relief to the assessee relying on the Jurisdictional High Court judgement in the case of CIT v. Firestone International (P.) Ltd. [2015] 60 taxman.com 235/234 Taxman 141/378 ITR 558 (Bom.). It is also discussed in the said decision of the Tribunal (supra),
14 Frost & Sullivan (India) Pvt. Ltd. the judgement of Bombay High Court (supra) was approved by the Hon'ble Supreme Court in the same case vide SLP(C)CC No.22512/2015 dated 05.01.2016.
On the other hand, ld. DR for the Revenue relied on the order of the Assessing Officer.
On hearing both the sides, we find the contents of para 25 to 28 are relevant to extract and the same are extracted hereunder :— "25. Additional Ground: Before us, the assessee raised an additional ground (extracted above) stating that the adjustments were made identity level instead of international transaction only. The CIT(A) decided the issue by observing as under :-
"2.6.3 I have considered the arguments of the Appellant. I find that the learned TPO has changed the transfer pricing method to TNMM from what was used by the Appellant (TNMM and RPM) therefore; onus is on the learned TPO to make the adjustment on the value of the international transaction as required u/s 92 of the Income Tax Act. It is clear that the adjustment can be made only to the value of the international transaction. Under TNMM, in absence of the determination of the net margin on value of the international transaction by the learned TPO, it will be presumed that the net margin of the international transaction will be the same as that of the average net margin of the comparable companies. Accordingly, I direct the learned AO to make the adjustment to the value of the international transaction."
The issue of restricting the adjustments to the extent of international transactions with AEs only, has been considered by us. We have also considered the legal proposition in existence on this issue and find it is settled legal matter that the adjustments cannot be extended to the entire receipts/turnover of the entity which may include transactions with non-AEs. TP adjustments need to be restricted to transaction with AEs only. In this regard, the Jurisdictional High Court judgement in the case of CIT v. Firestone International (P.) Ltd. (378 ITR 558) is relevant and the same is binding on us. The said decision is relevant for the conclusion of the ratio that the ALP can be considered on value of international transaction alone and not entire turnover of the assessee. In this case, the Revenue was aggrieved against the order of the Tribunal and the same was agitated before the Hon'ble High Court vide Question of Law 2(a) of the appeal and in para 3 of the said question of law was not entertained as substantial question of law. For the sake of completeness, the said para 3 is extracted hereunder :—
"3. As far as Question (a) is concerned, the learned Counsel for the Revenue is unable to show how it arises from the impugned order of the Tribunal. It appears that the question itself is academic. In the above view, there is no occasion to entertain Question (a) as substantial question of law."
15 Frost & Sullivan (India) Pvt. Ltd.
27. The said judgement of the Hon'ble High Court has become final by virtue of the Hon'ble Supreme Court judgment in the same case vide SLP(C)CC No.22512/2015 dated 05.01.2016. In fact, the Co-ordinate Bench of the Tribunal has also taken similar view in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT vide order dated 04.01.2012. The issue of manner of computation of adjustments restricting to the international transactions with AEs was discussed at length in paras 45 to 49 in the said order of the Tribunal (supra). For the sake of completeness, the said paras 45 to 49 are extracted as follows :—
"45. Ground 10 refers to incorrect computation of TPadjustments to the manufacturing activity. In this regard, referring to the manufacturing segment and sale affected in this segment, Sri Lohia read out that the total sale of this segment is Rs. 23,32,42,565/- and the relatable cost of material is Rs. 1528.65 lakhs, (of course, the assessee submitted a different figure of Rs. 1557.39 lakhs in some other context). Thus, this cost of material (controlled and uncontrolled cost) of Rs. 1557.39 lakhs includes the Rs. 602.19 lakhs, relatable to the transactions with AEs i.e. controlled cost. As per the Counsel, revenue has erred in computing the TP adjustment on the entire manufacturing segment sales instead of computing the TP adjustment on those sales relatable to the import of the components and spares procured from the AEs only. While establishing the ALP on this segment, the AO worked out the said variance @ 4.77% (i.e. 7.18% -2.41%) and worked out the corresponding quantum of adjustment at Rs. 1,11,25,670/- (i.e. 4.77*23,32,42,565/100). In this regard, the Ld counsel for the assessee mentioned that if total international transactions under consideration for adjustment on account of 'Import of raw materials, components and spares for assembly/manufacture of material handling products' worth Rs. 60,218,878/- works out to only 40% of the total cost, the same proportion of the total sales has to be considered for making TP adjustments. If the assessee's manner of adjustment is considered the additions should be restricted to Rs. 43,82,783/- only (Rs. 11,125,670 * Rs. 60,218,878/Rs. 152,865,285). In this regard, Ld Counsel relied on the provisions of the Rule 10B(1)(e) and also various judicial pronouncements on the subject i.e. (i) Emerson process Management India (P.) Ltd. (II) T Two International P Ltd. and others; IL Jin electronics (I) (P.) Ltd. 36 SOT 227 Del; Starlite case 2010-TII-28-ITAT-DEL-TP; Abhishek Auto Industries Ltd. 2010-TII-54-ITAT-DEL-TP etc.
We have heard the parties and perused the relevant provisions of the said rule. Sub clause (i) and (ii) of the Rule 10B(1)(e) referred to the expressions 'in relation to' and the 'relevant base'. They read as follows:
(i) The net profit margin realized by the enterprise from an international 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 realized 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;
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From the above, it is vivid that in TNMM, the net profit margin realized by the tested party, an assessee, out of the international transaction is computed in relation to sale effected (as in assessee' case), which is the relevant base. The expression 'in relation to' means 'in connection with' and it implies connection between impugned international transactions worth Rs. 60,218,878/- on account of Import of raw materials, components and spares for assembly/manufacture of material handling products' and to the related sales and not to the entire sales of the manufacturing segment of the assessee. The said relationship/ratio is the requirement in the present comparability analysis and not the entity level sales as wrongly considered by the TPO and relied upon by the DRP. In principle, such closure comparability analysis is needed in TNMM, when sales is used as a base for determining net profit margin. Thus, it is erroneous to bring relationship between the Rs. 60,218,878/- and Rs. 23,32,42,565/- i.e. the total sales. Assessee's failure to supply the data on relevant sales is no defense, when there are settled alternatives for adoption in such circumstances, well tested 'principle of proportionality' in our opinion should help. Thus, the base of sales does not need to be 'total sales'; but the proportionate sales relatable to the impugned international transactions. It is a commonsensical approach.
In this regard, we have perused the existing decisions relied upon by the assessee and the following extracts from some of the decisions are relevant and the same read as follows.
A. Emersons Process Management India P Ltd - AY-2006-07 -Pg 452 of Paper Book
"19. Fifthly, as has been consistently held by the coordinate benches, the transfer pricing adjustment is to be made with respect to internationaltransaction and not the entries sales…………. We, therefore, direct the Assessing Officer to compute the transfer pricing adjustment in the light of this legal position. "
B. Two International P Ltd. and Tara Jewels Eports P Ltd. and Tara Ultimo P Ltd. 5645 & 5646/m/2008 Ay 2004-05 - para 13 @ page 460 of Paper Book:
"13. We have considered the rival submissions carefully. We partially agree with the submissions of the ld. Counsel for the assessee that original TPO's order is definitely erroneous because he has applied the net profit margin of 7.25% on the gross sales and followed a complicated procedure to arrive at the amount of adjustment. In simple terms if the sales to Associated Enterprises is taken at Rs. 25 crores and straight way 7.25% margin is applied then approximately total margin would be Rs. 1.81 crores, whereas adjustment has been made at Rs. 2,57,26,138/-..."
C. IL Jin Electronics (I) (P.) Ltd. v ACIT 36 SOT 227 Page 470 of the Paper Book:
17 Frost & Sullivan (India) Pvt. Ltd.
"15. The assessee has also taken one alternative ground out of the total raw materials consumed by the assessee for manufacturing printing circuit boards, only 45.51 per cent of the total raw materials were imported through assessee's associated concerns, and , therefore, any adjustment, if any called for, can only be made to the 45.51 per cent of the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee's associate concerns. In the present case, the AO has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the AO to modify the assessment and make the adjustment only to the extent of difference in the arm's length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the AO and further confirmed by the CIT(A) is reduced. We order accordingly."
D. DCIT v Starlite 133 TTJ 425 Mum AY 2002-03 Page Para 13 at 478 of the Paper Book: "13. As in this case, TPO has not applied TNMM, as contemplated in the Act, we have no other alternative but to set aside her order……….. We also agree with the arguments of learned counsel for the assessee that adjustments, if any, arising due to computation of ALP should be restricted only to the internationaltransactions and not to the entire turnover of the assessee company. No addition can be made to local transactions under Chapter X of the Act. Such things are done only when the AO invokes s.
We direct the AO to restrict the adjustments, if any only to internationaltransactions, which are found by him to have taken place at price other than ALP."
E. Abhishek Auto Industries Ltd. v DCIT 136 TTJ 530 Del- para 8.2 at Page 494 of the Paper book: "8.2 It has not been disputed that provisions X, s. 92C deals with international transactions only and not with transactions which have no international cross-border element at all. Therefore, the basis of making the adjustments on the enterprise level by taking Rs. 68.76 crores as the base is not correct. What should have been taken is the sale to domestic parties using Takata technoloty and Takata raw material amounting to Rs. 12.74 crores. The segment that was to be looked at was the international segment, that is domestic sale using foreign technology and foreign raw material. As given by the appellant, the operating profit margin on AE sales is 10.49 per cent whereas in the domestic sales segment it is only 2.88 per cent. …………….. We, therefore, accept this second proposition also that only international transaction is to be taken into account while calculating the ALP".
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All these cited decision in general and the decision in the case of M/s IL Jin Electronics (I) (P.) Ltd, supra, in particular are uniform in asserting that the TP adjustments are to computed not considering the entity level sales. Rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The principle of proportionality is relevant here and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the AEs i.e. controlled cost. Accordingly, the grounds 10 relating to Incorrect computation of transfer pricing adjustment to the manufacturing activity is allowed pro tanto."
Considering the above settled legal proposition on the issue, we are of the opinion that the said issue raised in the additional ground has to be decided in favour of the assessee. Consequently, we direct the Assessing Officer to restrict the adjustments, if any only to the international transaction with AEs. Accordingly, additional ground is adjudicated in favour of the assessee. Accordingly, the additional ground is allowed." 23. Considering the above settled nature of the issue, we are of the opinion that the order of the CIT(A) is fair and reasonable on this issue and it does not call for any interference. Thus, the relevant grounds raised by the Revenue are dismissed.”
26. Following the above said decision, we hold that the Ld DRP was justified in giving the direction to restrict transfer pricing adjustment to international transaction entered with AR.
In the result, the appeal filed by the assessee is treated as allowed and the appeal of the revenue is dismissed.
Order pronounced in the open court on 11.05.2022.