TATA TECHNOLOGIES LIMITED,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 7,, PUNE

Both the appeals of same assessee on similar issue were heard together and are being disposed of by this consolidated order for the sake of convenience.

First, we shall take up the appeal in ITA No.168/PUN/2018, relating to assessment year 2013-14, wherein the assessee has raised the following grounds of appeal:- The grounds stated hereunder are independent of, and without prejudice to one another: Transfer Pricing Grounds Ground No.1 1. On the facts and in the circumstances of the case, and in law, the Honorable Dispute Resolution Panel ('Hon'ble DRP'), and the Learned Assessing Officer ('Ld. AO') pursuant to the directions of the Hon'ble DRP, erred in making a TP adjustment of Rs.4,65,17,750 to the income of the Appellant by holding that the Appellant's international transaction pertaining to payment of commission does not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). The Appellant prays that the addition pertaining to payment for commission ought to be deleted. Ground No.2 2. On the facts and in the circumstances of the case, and in law, the Hon'ble DRP / Ld. AO, erred in rejecting the economic analysis conducted by the Appellant for demonstrating the arm's length nature of the commission paid to Associated Enterprises ('AEs'). The Appellant prays that the economic analysis conducted by the Appellant ought to be upheld. Ground No.3 3. On the facts and in the circumstances of the case, and in law, the Hon'ble DRP / Ld. AO, erred in re-computing the Arm's Length Price ('ALP') of the Appellant's international transaction pertaining to payment of commission to AE at 'Nil'. The Appellant prays that the said re-computation ought to be deleted. Ground No.4 4. On the facts and in the circumstances of the case, and in law, the Hon'ble DRP / Ld. AO, erred in contravening the principle of consistency in connection with determining the ALP of the Appellant's international transaction pertaining to payment of commission to AE. The Appellant prays that the principle of consistency be upheld and the adjustment made by the Hon'ble DRP / Ld, AO ought to be deleted.

The ground of appeal Nos.1 to 5 raised by assessee are against transfer pricing adjustment made on account of payment of commission. The learned Authorized Representative for the assessee pointed out that the issue is squarely covered by the order of Tribunal in assessee’s own case in assessment year 2012-13.

Briefly, in the facts of the case, the assessee was engaged in providing services of CAD/CAM engineering and design consultancy, SAP implementation and maintenance, IT consultancy and providing networking solutions. The Transfer Pricing Officer (TPO) noted that the assessee was responding to its customers needs through its subsidiary in three continents and through its offshore development centre in India. The assessee’s customers were world premium automotive aerospace and consumer durable manufacturers. The assessee had entered into various international transactions with its associate enterprises including payment of commission to its associate enterprises. The TPO notes the nature of payments on commission of ₹ 4.65 crores to associate enterprise Tata Technologies Pte. Ltd. (in short ‘TTPL’). The case of assessee was that it was paying said

We find that similar issue of payment of commission @ 6% on its sales arose before the Tribunal in assessee’s own case in ITA No.723/PUN/2017, relating to assessment year 2012-13. The Tribunal vide order dated 01.02.2019 has noted the rendering of services by TTPL and has held that Commission Agreement dated 01.12.2007 existed between the assessee and TTPL and as per clauses of the said agreement, it was clear that TTPL was

Now, coming to the next issue which is raised vide ground of appeal No.6 i.e. disallowance of amortization of premium paid on leasehold land.

The learned Authorized Representative for the assessee pointed out that the said issue stands covered by the order of Tribunal in assessment years 2001-02 and 2003-04, which has been applied in assessment year 2012-13. The said issue raised of disallowance of amortization of premium paid on leasehold has been decided by the Tribunal with lead order in ITA No.1345/PN/2011, relating to assessment year 2001-02 vide paras 43 to 46 at pages 14 and 15 of the said order and following the same parity of reasoning,

Similarly, the next issue raised vide ground of appeal No.7 of disallowance of provision made for expenditure in respect of Bhavishya Kalyan Yojana has also been decided by the Tribunal in ITA No.1346/PN/2011, relating to assessment year 2003-04, vide paras 70 to 87 at pages 24 to 34 of the said order. The said issue has been decided against the assessee. Following the same parity of reasoning, we find no merit in the ground of appeal No.7 raised by the assessee and the same is dismissed.

Now, coming to the next issue i.e. disallowance made under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (in short ‘the Rules’).

The learned Authorized Representative for the assessee in this regard referred to the order of Assessing Officer at page 5 and pointed out that the Assessing Officer has failed to record any satisfaction before invoking provisions of section 14A of the Act. In this regard, reliance was placed on the decision of the Hon’ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT (2017) 394 ITR 449 (SC) and H.T. Media Ltd. Vs. Pr.CIT in ITA Nos.548 & 549/2015, judgment dated 23.08.2017. He referred to paras 39 and 52 of the said decision. The learned Authorized Representative for the assessee on without prejudice basis also pointed out that since own funds were more than investments made, then there was no merit in making any disallowance under Rule 8D(2)(ii) of the Rules. In respect of application of Rule 8D(2)(iii) of the Rules, the learned Authorized Representative for the

The learned Departmental Representative for the Revenue in this regard pointed out that as far as recording of satisfaction by the Assessing Officer is concerned, there is no proper format provided and facts of each case need to be seen. Our attention was drawn to para 4.4 at page 5 of the draft assessment order.

We have heard the rival contentions and perused the record. The Assessing Officer while passing draft assessment order notes that the assessee had shown dividend income of ₹ 14,34,29,601/- and also ₹ 16,81,61,491/- on account of claim of exemption of 10AA of the Act. The Assessing Officer further notes the assessee to have claimed interest expenditure of ₹ 1.61 crores and he further noted that the assessee’s average investments in exempt earning instruments were ₹ 230 crores. The Assessing Officer further notes the assessee to have disallowed only ₹ 39,32,077/- under section 14A of the Act. The Assessing Officer thus, recorded satisfaction that Looking at the financials of the assessee, the disallowance u/s 14A made by the assessee suo-moto is inadequate. Therefore, vide order sheet entry, show cause notice was issued to the assessee Why the disallowance of interest expenses relatable to exempt investment should not be made u/s 14A read with Rule 8D. In reply, the assessee explained its case. However, the same were found to be not acceptable. The submission of assessee was that it had huge interest funds for investments and it also earned interest, so no disallowance was warranted. The Assessing Officer notes that it was undeniable that the assessee had

The assessee is in appeal against aforesaid disallowance made under section 14A of the Act read with Rule 8D of the Rules.

The perusal of draft assessment order clearly reflects that satisfaction was duly recorded by the Assessing Officer, wherein he noted not only the investments made by assessee but also noted the interest expenditure incurred by assessee and also suo-motu disallowance made by assessee under section 14A of the Act. The Assessing Officer after considering all these aspects of investments made by assessee and tax free income earned by assessee from dividends and under section 10AA of the Act had come to a finding that suo- motu disallowance made by assessee was not appropriate and hence, issued show cause notice to the assessee. In such scenario, where proper satisfaction has been recorded by the Assessing Officer, we find no merit in the plea of assessee in this regard.

Now, coming to explanation of assessee vis-a-vis the disallowance being not warranted in the hands of assessee, which was on without prejudice basis. The first plea of assessee is that it had own funds which were more than its investments and hence, no disallowance under Rule 8D(2)(ii) of the Rules. This argument of assessee needs verification at the end of Assessing Officer.

Now, coming to second disallowance made i.e. under Rule 8D(2)(iii) of the Rules. The Assessing Officer is again directed to work out the disallowance by considering investments which have yielded dividend income. The Assessing Officer shall afford reasonable opportunity of hearing to the assessee in this regard. The ground of appeal No.8 is thus, allowed for statistical purposes.

The last issue raised vide ground of appeal No.9 is the claim of enhanced deduction under section 10A of the Act.

The plea of assessee in this regard is that enhanced deduction should be granted in case any corporate tax addition is made in the hands of assessee excluding transfer pricing additions. In this regard, reliance was placed on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. reported in 330 ITR 175 (Bom).

The learned Departmental Representative for the Revenue fairly admitted that the said computation of deduction under section 10A of the Act was covered.

We find that the issue raised vide ground of appeal No.9 is squarely covered by the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. (supra). Accordingly, we hold that the assessee is entitled to enhanced deduction under section 10A of the Act on account of corporate tax additions made in its hands. We direct the Assessing Officer to re-compute the aforesaid deduction under section 10A of the Act. Accordingly, ground of appeal No.9 is allowed.

Now, coming to appeal of assessee in ITA No.1708/PUN/2018, relating to assessment year 2014-15, wherein the assessee has raised the following grounds of appeal:- Transfer Pricing Grounds Design Engineering Segment (DES) 1. On the facts and in the circumstances of the case, and in law, the Learned Assessing Officer (‘Ld AO'), following the directions of the Learned Dispute Resolution Panel ('Ld DRP') erred in confirming the action of the Learned Transfer Pricing Officer (‘Ld. TPO') in rejecting the Arm's Length Price ('ALP') computation undertaken by the Appellant for benchmarking the international transactions pertaining to Design Engineering Services ('DES') segment, thereby making a transfer pricing ('TP') adjustment of INR 25,88,00,000. The Appellant prays that the TP analysis conducted by the Appellant ought to be accepted and consequently the TP adjustment ought to be deleted. 2. On the facts and in the circumstances of the case, and in law, the Ld. AO /Ld DRP erred in rejecting the audited segmental information submitted for benchmarking the international transactions pertaining to DES segment. The Appellant prays that the audited segmental profitability submitted by the Appellant ought to be accepted for ALP determination of international transactions pertaining to the DES segment. 3. On the facts and in the circumstances of the case, and in law, the Ld AO /Ld DRP/Ld TPO erred in modifying/ introducing additional quantitative filters and conducting a fresh benchmarking analysis without sharing a detailed step by step search strategy and the Functional, Assets and Risk ('FAR') analysis conducted. The Appellant prays that the ALP determined by the Appellant in the TP study report for international transactions pertaining to DES segment ought to be accepted.

The learned Authorized Representative for the assessee pointed out that except for the issues raised vide ground of appeal Nos.1 to 8 against transfer pricing adjustment made in Manufacturing Segment, all the other grounds of appeal are similar to the grounds of appeal raised in assessment year 2013-14. He then, took us through the individual grounds of appeal.

We find that ground of appeal Nos.9 to 11 raised by assessee are on account of transfer pricing adjustment made for payment to commission to associate enterprise. We have already adjudicated this issue while deciding ground of appeal Nos.1 to 5 in assessment year 2013-14 and following the same parity of reasoning, the issue is allowed in the hands of assessee.

The issue raised in ground of appeal Nos.12 and 13 is on account of claim of amortization of premium paid on leasehold land and allowance of provision made for expenditure in respect of Bhavishya Kalyan Yojana has also been addressed while deciding ground of appeal Nos.6 and 7 in assessment

The issue in ground of appeal No.14 is disallowance made under section 14A of the Act read with Rule 8D of the Rules. We have already adjudicated this issue raised vide ground of appeal No.8 in assessment year 2013-14. Following the same parity of reasoning, we direct the Assessing Officer to follow our directions and re-compute disallowance under section 14A of the Act, if any, after affording reasonable opportunity of hearing to the assessee.

The ground of appeal No.15 is against disallowance of provision made for expenditure in respect of medical insurance scheme for employees at ₹ 86,48,000/-. The learned Authorized Representative for the assessee fairly pointed out that the issue stands covered against assessee by the order of Tribunal in assessee’s own case for assessment year 2003-04 (supra).

We find that the Tribunal vide paras 70 to 87 at pages 24 to 34 of order had decided the said issue in assessment year 2003-04 against the assessee. Following the same parity of reasoning, we uphold the order of Assessing Officer / DRP and dismiss ground of appeal No.15.

The issue raised vide ground of appeal No.16 is against enhanced deduction under section 10AA of the Act. We have already adjudicated this issue in assessment year 2013-14 vide ground of appeal No.9 and following the same parity of reasoning, we direct the Assessing Officer to apply the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. (supra).

The issue raised vide ground of appeal No.17 is against initiation of penalty proceedings under section 271(1)(c) of the Act is premature and the same is dismissed.

Now, coming to ground of appeal Nos.1 to 8 raised by assessee against transfer pricing adjustment.

The learned Authorized Representative for the assessee in this regard pointed out that in case ground of appeal No.2 raised by assessee is adjudicated in favour of assessee, then the other issues would become academic in nature.

The assessee was engaged in providing Design Engineering Services to its associate enterprise. The revenue in AE segment was ₹ 295 crores and in non-AE segment was ₹ 467 crores; hence, total revenue earned by assessee was ₹ 764 crores. In the TP study report the assessee had benchmarked the said transactions on entity basis, wherein the margins of assessee were 27.99%. The assessee had selected five concerns as comparables and had declared its international transactions to be at arm's length price. However, the TPO rejected all five concerns picked up by the assessee and selected two concerns as comparables i.e. Eclerx Services Ltd. and Tata Elxsi Ltd., whose mean margins worked out to 45.19%. The assessee before the TPO filed segmental details of AE segment. However, the TPO rejects the same since the accounts were not audited. The DRP also rejected the same as the assessee himself in the TP study report had taken entity level results.

The learned Authorized Representative for the assessee pointed out that though before the DRP, audited segmental accounts were filed but DRP rejects the claim of assessee. In this regard, he stated that the law does not require data of segmental details to be audited, however, before the DRP, it filed segmental details and as per the segmental details, the margins of assessee for AE segment worked out to 44.44%. Our attention was drawn to page 287 of Paper Book, under which segmental details are provided. The learned Authorized Representative for the assessee stressed that DRP / TPO should have accepted segmental details. He then, referred to provisions of section 92 of the Act and pointed out that requirement is to benchmark international transactions with associated enterprise and then may make or delete addition. He stressed that segmental accounts are to be adopted and margins of segmental to be compared with margins of concerns picked up as comparables. He then stressed that vide ground of appeal No.6, the assessee has raised the issue that Eclerx Services Ltd. is engaged in diversified fields and the said concern should be excluded but since the issue would be academic if issue of segmental details are considered, then this issue does not need adjudication.

The learned Departmental Representative for the Revenue on the other hand, relied on the orders of Assessing Officer / DRP.

We have heard the rival contentions and perused the record. Briefly, in the facts of the case the assessee had segregated its operations into two segments i.e. Design Engineering and Software Distribution. The assessee had submitted segmental financial information for the two segments. The

Now, coming to second segment of Design Engineering Services, the assessee has shown PLI at 27.99%. The assessee had applied data of three years of comparables and had declared that its international transactions were at arm's length. The TPO however, asked the assessee to apply data of contemporaneous period. However, the TPO also came to the conclusion that none of concerns selected by assessee were functionally comparable. The TPO thus, carried out fresh search and selected two concerns i.e. Eclerx Services Ltd. and Tata Elxsi Ltd. as comparables whose mean margins worked out to 45.19%. Another aspect noted by the TPO was the segmental information submitted by assessee, as per which the assessee had declared PLI at 54.39%. However, submissions of assessee were not found acceptable, since the assessee had submitted segmental details, only in response to final show cause notice issued. Accordingly, the Assessing Officer computed adjustment in respect of Design Engineering Services and made an upward adjustment at ₹ 25.88 crores. The Assessing Officer issued draft assessment order, against which the assessee filed objections before the DRP. The DRP noted modified filters applied by the TPO and functional comparability of comparables finally selected and also referred to various decisions on the point and in final analysis held the concern Eclerx Services Ltd. to be comparable. Further, the DRP noted that the assessee had furnished additional evidence in the form of certificate for segmental breakup, from which it was clear that services to associated enterprise were at ₹ 295 crores vis-a-vis third party at ₹ 467 crores. The assessee thus, proposed that operating margins using segmental details should be adopted. The DRP did not find any merit in

The question which arises is whether where the assessee is carrying on its business activities with AEs and non AEs, in order to benchmark its international transactions with AEs, the information is to be applied on entity level or where segmental information is available, whether the same is to be applied to work out the margins in the hands of assessee.

Under the provisions of section 92C of the Act for computation of arm's length price, benchmarking has to be done of all the international transactions of assessee with its AEs and consequently, segmental details of AE segment is to be applied and not results at entity level. Where the assessee has provided

The Pune Bench of Tribunal in Tieto IT Services India (P.) Ltd. Vs. DCIT (2018) 92 taxmann.com 8 (Pune-Trib.) had also in similar circumstances directed the application of segmental profitability while benchmarking its international transactions with AEs. Accordingly, the ground of appeal No.2 raised by assessee is allowed and the other linked issues raised vide ground of

In the result, both the appeals of assessee are partly allowed.