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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 19.10.2012 passed under Section 254/143(3) read with Section 144 C of the Income Tax Act, 1961 passed by ACIT, Circle-1, New Delhi (Assessing Officer), for Assessment Year 2008-09.
The grounds of appeal are as under:-
1. Ground 1: That the Learned Assessing Officer (‘Ld. AO’) erred in passing the impugned draft assessment order dated December 23, 2011 (‘the Draft Assessment order’) and the Learned Dispute Resolution Panel (‘Ld. DRP’) erred in passing directions under Section 144(C) of the Income Tax Act, 1961 (‘the Act’) confirming the Draft Assessment order. On the facts and circumstances of the case and in law, the learned AO erred in assessing the income of the Appellant at Rs.35,93,36,280 as against the returned income of Rs.21,89,02,842.
2. Ground 2: That on the facts and circumstances of the case and in law the Ld. AO / Learned Transfer Pricing Officer (‘Ld. TPO’) and the Ld. DRP have erred in making an addition of Rs. 12,19,46,634 in relation to the manufacturing segment of the Appellant.
2.1 That on the facts and circumstances of the case and in law the Ld. AO / Ld. TPO and Ld. DRP grossly erred in disregarding the methodical benchmarking process carried out by the appellant in the Transfer Pricing (‘TP’) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’); and in particular modifying/ rejecting the filters applied by the Appellant;
2.2. That on the facts and circumstances of the case and in law the Ld. AO / Ld. TPO and Ld. DRP grossly erred in rejecting comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of additional filters in an arbitrary manner while determining the arm’s length price; and 2.3 That on the facts and circumstances of the case and in law the Ld. AO/ TPO and Ld. DRP grossly erred in including companies in the comparability analysis which do not satisfy the test of comparability, rejecting companies similar to the appellant while performing the comparability analysis and thereby resorting to cherry picking of comparables.
Ground 3: That the Ld. AO / Ld. TPO and the Ld. DRP have failed in understanding the nature of the transaction for payment of testing, warranty repair and service charges fee and the functions being performed by the AE in relation to the transaction under review and thereby proposing an alternative addition of Rs. 2,75,86,070.
Ground 4: That the Ld. AO / Ld. TPO and the Ld. DRP have erred by questioning the commercial / business wisdom of the Appellant for undertaking the transaction for payment of testing, warranty repair and service charges fee and not appreciating the fact that mere non-existence of a comparable arrangement does not mean that the transaction has not been undertaken at arm’s length.
Ground 5: The Ld. AO / Ld. TPO and the Ld. DRP have grossly erred by applying Comparable Uncontrolled Price (‘CUP’) method in contravention of the provisions of Rule 10 B of the Income Tax Rules, 1962.
Ground 6: That the Ld. AO / Ld. TPO and the Ld. DRP have failed to understand the characterization of the entities involved in the transactions by not appreciating the fact that the associated enterprise (‘AE’) is a routine distributor bearing normal risks and is the least complex of the two entities involved in the transaction.
Ground 7: The Ld. AO / Ld. TPO and Ld. DRP have grossly erred by not appreciating the corroborative analysis furnished by the Appellant for the transaction relating to export of motors and testing, warranty repair and service charges fee.
Ground 8: That on the facts and in the circumstances of the case and in law, both Ld. AO and Ld. DRP erred in denying Appellant’s claim of deduction under section 10B of the Act amounting to Rs. 1,84,86,800 in respect of its newly established hundred percent Export Oriented Unit (‘EOU’) despite the fact that the Appellant satisfied all the conditions laid down under section 10B of the Act.
8.1 That on the facts and in the circumstances of the case and in law, both the Ld. AO and Ld. DRP erred in rejecting the Appellant’s claim of the deduction under Section 10B of the Act ignoring the factual and legal position that the new unit is a 100 percent EOU duly approved by the prescribed authorities and a separate undertaking for the purpose of deduction under section 10B of the Act.
8.2. That on the facts and in the circumstances of the case and in law, the Ld. AO and Ld. DRP erred in holding that no separate industrial unit came into existence for manufacturing of articles or things.
8.3 That on the facts and in circumstances of the case and in law, the Ld. AO and Ld. DRP has erred in holding that the new unit was an expansion of the existing unit and not an integrated new unit
Ground 9: That on the facts and in the circumstances of the case and in law, the both Ld. AO and Ld. DRP erred in not following the order passed by Hon’ble Commissioner (Appeals) [Hon’ble CIT(A)’] for previous assessment years (‘AY’) i.e. AY 2003-04 to AY 2006-07, wherein Hon’ble CIT(A) has upheld the Appellant’s claim of deduction under Section 10B of the Act and deleted the addition made on this account.”
That the above grounds of appeal are independent and without prejudice to each other.”
3. The assessee company i.e. Marathon Electric India Pvt. Ltd. (MEIPL) is engaged in manufacturing and sale of Fractional Horse-Power (“FHP”) electric motors. These motors find a wide application in products like air conditioners, coolers, washing machines and electric fans. For the year under consideration, the assessee filed its return of income declaring a total income of INR 218,902,842. During the assessment proceedings, the Transfer Pricing Officer (TPO) rejected the TP documentation of the assessee by not accepting the comparables on the ground of being functionally dissimilar. Accordingly, the TPO rejected the arguments put forth by the assessee and passed an order making an adjustment of INR 121,946,634 in the manufacturing segment. The TPO also made an upward adjustment of INR 27,586,070 on account of testing and warranty services charges and accordingly total enhancement of INR 149,532,704 was made to the income of the assessee. Accordingly draft assessment order dated 23.12.2011 was passed. Aggrieved by the draft order, the assessee filed its objections before the Dispute Resolution Panel (DRP). The DRP vide direction dated 27.08.2012 upheld the adjustment proposed by the TPO/ AO. The Assessing Officer vide order dated 19.10.2012 thereby upholding the adjustment proposed by the TPO. In addition to the Transfer Pricing adjustment, the Assessing Officer also held that export oriented unit (“EOU”) is just an expansion of existing unit and not an integrated new unit and in view of same disallowed the claim u/s 10B of the Act.
Aggrieved by the Assessment Order, the assessee has filed present appeal before us.
5. As regards to Ground No. 1, this ground is general against the addition made by the Assessing Officer in the final assessment order. Hence, Ground No. 1 is dismissed.
As regards to Ground No. 2 relating to an addition of Rs. 12,19,46,634 in relation to the manufacturing segment of the assessee. The Ld. AR submitted that the AO/TPO and the DRP grossly erred in disregarding the methodical benchmarking process carried out by the assessee in the Transfer Pricing documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962; and in particular modifying/ rejecting the filters applied by the assessee. The Ld. AR submitted that on the facts and circumstances of the case and in law the AO/TPO and the DRP grossly erred in rejecting comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of additional filters in an arbitrary manner while determining the arm’s length price. The Ld. AR submitted that on the facts and circumstances of the case and in law the AO/TPO and the DRP grossly erred in including companies in the comparability analysis which do not satisfy the test of comparability, rejecting companies similar to the assessee while performing the comparability analysis and thereby resorting to cherry picking of comparables. The assessee is engaged in manufacturing and sale of Fractional Horse Power (‘FHP’) electric motors used in air conditioners, coolers, washing machines, etc. During the year, the assessee prepared a detailed TP study by following a methodical approach and selected 7 comparable companies for benchmarking the its international transaction. The business description of the comparables selected in the TP study is as follows:
S Name of comparable Business Description No.
Engaged in manufacture of electric cables, Emgee Cables & 1 communication cables, transmitters and Communications Ltd. receivers
Fedders Lloyd Corp. Engaged in home appliances and consumer 2 Ltd. electric segment
Guardian Controls Engaged in manufacturing of relays that find 3 Ltd. application in home appliances
Engaged in manufacturing of electrical and Value Industries 4 electronic home appliances like washing Limited machines, refrigerators, etc.
La-Gajjar Engaged in manufacturing of submersible 5 Machineries Ltd. pumps and submersible motors
Engaged in manufacturing of instrument Rexnord Electronics 6 cooling fans, exhaust fans and motors used for Limited industrial and domestic purpose
S Name of comparable Business Description No.
Orient paper & 7 Industries Ltd. – Fan Engaged in manufacture of electrical fans segment On the basis of the above business description, the assessee selected the aforementioned companies for benchmarking the international transaction. Further, the Ld. AR pointed out that assessee selected all the comparables which were engaged in manufacturing function which is of prime importance while conducting a benchmarking analysis while applying TNMM which is tolerant to product differentiation. During course of assessment proceedings, the Ld. TPO rejected the approach followed by the assessee in its TP study stating that the companies are functionally different. The TPO rejected the comparable search undertaken by the assessee in the transfer pricing documentation and proceeded to perform a fresh search of comparable companies proposing a final set of 3 comparables in its order. The final set of comparable companies (along with business description) proposed in the TPO order is as follows:
S Name of comparable Business Description No.
Alfa Transformers Engaged in manufacturing of Transformers 1 Ltd. only.
Engaged in two segment: Manufacturing of Apar Industries 2 specialty and transformer oil and conductor Limited segment
S Name of comparable Business Description No.
Engaged in products like electrical steel Pitti Laminations 3 laminates, motor cores, sub-assemblies, die- Limited cast rotors, etc During course of proceedings, the DRP upheld the fresh search of comparable undertaken by the TPO during course of assessment proceedings and confirmed the addition proposed in the order.
6.1 The Ld. AR submitted that the TPO has rejected the comparable selected by the assessee in TP documentation stating that they are functionally different. However, the comparable companies selected by the assessee were engaged in manufacturing function and only the products were different.
The business description of comparable companies along with supporting descriptions is as follows:
S Name of Business Description No. comparable
Emgee Cables & Engaged in manufacture of electric cables, 1 Communications communication cables, transmitters and Ltd. receivers
Fedders Lloyd Engaged in home appliances and consumer 2 Corp. Ltd. electric segment
Guardian Controls Engaged in manufacturing of relays that find 3 Ltd. application in home appliances
S Name of Business Description No. comparable
Engaged in manufacturing of electrical and Value Industries 4 electronic home appliances like washing Limited machines, refrigerators, etc.
La-Gajjar Engaged in manufacturing of submersible 5 Machineries Ltd. pumps and submersible motors
Engaged in manufacturing of instrument cooling Rexnord 6 fans, exhaust fans and motors used for Electronics Limited industrial and domestic purpose
Orient paper & 7 Industries Ltd. – Engaged in manufacture of electrical fans Fan segment Further, the Ld. AR submitted that the search strategy followed in this year has been followed by the assessee consistently over the years without any change, which has been accepted by the Revenue Department in future years. The summary of comparable companies accepted in the future year by department is as follows:
S Comparable company FY 2007- FY 2008- No. 08 09 1 Emgee Cables & √ √ Communications Ltd. 2 Fedders Lloyd Corp. Ltd. √ √
3 Guardian Controls Ltd. √ √ 4 Value Industries Limited √ √ 5 La-Gajjar Machineries Ltd. √ 6 Rexnord Electronics Limited √ 7 Orient paper & Industries Ltd. – √ √ Fan segment The TPO has changed few qualitative filters and introduced new comparables without providing the accept/ reject matrix. Further, while proposing the fresh comparable set, the TPO has not followed its own approach (followed for rejecting assessee’s comparable) while selecting the fresh comparables as all the aforementioned comparable are also engaged in manufacturing of different products. The business description of comparable companies is as follows:
Name of comparable Business Description S No.
Alfa Transformers Engaged in manufacturing of Transformers 1 Ltd. only.
Engaged in two segment: Manufacturing of Apar Industries 2 specialty and transformer oil and conductor Limited segment
Engaged in products like electrical steel Pitti Laminations 3 laminates, motor cores, sub-assemblies, die- Limited cast rotors, etc
The Ld. AR submitted that, it is clearly visible that the companies finally selected by the TPO are also engaged in different products and is a clear departure from the approach of selecting the comparables which are engaged in similar business of the assessee. This approach followed by the TPO clearly indicates that the TPO has resorted to cherry picking of the comparables and thus demonstrated an intention to arrive at a pre- formulated opinion with an intention of making an addition to the returned income of the assessee. In this regard, the assessee would place reliance on the following judgement in respect of cherry picking of comparables. • ACIT Vs M/S Toshiba India Pvt Ltd (ITA No.3175/Del /2007)
• Philips Software Centre Private Limited vs. ACIT, Bangalore (ITA No. 218(BNG)/08)
• GE India Technology Centre Private Limited vs DDIT (ITA No. 789/Bang/2010 and & 025/Bang/2011)
The Ld. AR submitted that the analysis undertaken by the assessee as a part of transfer pricing documentation should be upheld and the approach adopted by the TPO to cherry pick high margin companies during the course of assessment proceedings is ought to be rejected.
6.2 Without prejudice to the above contentions, the Ld. AR further submitted that if the comparables selected by the TPO are to be considered, then the comparables selected by the assessee in the TP documentation with similar business description vis-à-vis the TPO’s comparables should also be selected. In addition to above, the Ld. AR also submits that the TPO has erred in calculating the margin for the manufacturing segment. The detailed margin computation was given in Appendix G of the TP study of the assessee. However, the TPO while recomputing the margin of the assessee has not given any cogent reason for doing so. Considering the same, the Ld. AR prayed that the margin selected by the assessee in the TP study should be considered for benchmarking the subject international transaction.
The Ld. DR submitted that in respect of the issue of TPO’s power to modify/reject the Economic Analysis of the assessee, the decision of DENSO INDIA LTD Vs CIT {2016- TII- 14- HC- DEL- TP} is applicable, wherein it is held that the AO is under no obligation to demonstrate the existence of tax avoidance for invocation of transfer pricing provision. The Ld. DR relied upon the following case laws as well:
� Coca Cola Pvt. Ltd 309 ITR-194 (P&H), � ITO v TIANJIN TIANSHI India Pvt Ltd (ITA NO 3991/DEL/2010) AY 2006-07 ITAT Delhi H Bench, � SAP Labs India Pvt Ltd Vs ACIT 2011 44 SOT 156 Bangalore, � ITAT Special Bench Decision in the case of Aztec Software and Technologies Services Ltd Vs ACIT 2007 294 ITR (AT) 32 (Bang) SB, � Aztec Software and Technology Ltd Vs DCIT 107 ITD 141 (Bang) (SB), � UE Trade Corporation (India) (2011-TII-04-ITAT-Del-TP) and � M/s ADP Pvt. Ltd (2011-TII-44-ITAT-Hyd-TP).
On the issue of Use of Current year data Vs. multiple year data, the Ld. DR relied upon the Jurisdictional High Court in the case of CIT Vs DENSO HARYANA PVT LTD (2009- TIOL- 696- DEL- IT), wherein this view has been affirmed. In Deloitte Consulting India Pvt. Ltd (ITA NO.1082/Hyd/2010), the Tribunal rejected the taxpayer’s claim about non availability of current year data at the time of filing the return. The view of Revenue is also supported by a large numbers of judgments of Tribunal’s decision which are mentioned below: i. HARWORTH (INDIA) PVT. LTD(2011- TII- 64- ITAT- DEL- TP) ii. STMICRO ELECTRONICS (2011- TII- ITAT- DEL- TP) iii. BIRLA SOFT LTD (2011-TIOL- 24-ITAT- DEL) iv. DELHI HIGH COURT in CIT Vs. CHRYSCAPTIAL INVESTMENTS ADVISORS (INDIA) PVT LTD v. ITAT MUMBAI in the case of M/s EMERSON ELECTRIC COMPANY (INDIA) PVT LTD Vs DCIT As regards to different financial year ending filter, the Ld. DR relied upon the decision in Techbooks International Pvt. Ltd Vs DCIT (2015- TII- 282- ITAT- DEL- TP) and M/s ADP (P.) Ltd. [2011] 10 taxmann.com 160 (Hyderabad),/[2012]15 ITR(T) 203 (Hyderabad), wherein it is held that data of subsequent period cannot be considered for comparison while determining arm's length price. As regards to applications of RPT filter, the Ld. DR submitted that cases having some RPT can be taken as comparable as they do not materially affect the price/margins. This view has been upheld by various Tribunal orders, including Delhi Benches. Following are the judgments which favour the Revenue:-
� Actis Advisers Pvt. Ltd Vs DCIT(2013) 146 ITD 314(Delhi) � DSM Anti invectives India Ltd Vs DCIT TS- 243- ITAT- 2013(Chand)- TP � Global Logics India Pvt. Ltd Vs DCIT 2013- TII- 43- ITAT- DEL- TP � ACIT Vs Zee Entertainment Enterprises Ltd 2014- TII- 181- ITAT- MUM- TP � ITAT Bangalore in M/s ACI WORLD WIDE SOLUATION PVT. LTD Vs ACIT 2015- TII- 430- ITAT- Bang- TP
As regards to comparables vis-a-vis RPT Filter, the Ld. DR relied on following decisions:
� ITO Vs. NIT DATA GLOBAL DELIVERY SERVICES LTD 2016- TII- 261- ITAT- DEL- TP
� Toluna India Ltd. And Actis Advisors Pvt. Ltd. Vs. DCIT {2012-TII-136- ITAT-DEL-TP} Stream International Services Pvt. Ltd. Vs. ACIT {2013- TII-42-ITAT-MUM-TP}
As regards to diminishing Revenues Trend, the Ld. DR relied upon the case of Sony India Pvt. Ltd. Vs DCIT (114 ITD 448) where one of the Consequences of such erroneous trend in growth of company is also the company resulting into negative net worth. As regards to persistent loss and peculiar circumstances filter and negative net worth, the Ld. DR relied upon the following decisions:- a. CRM SERVICES INDIA (P) LTD (2011-TII-86-ITAT-DEL-TP) b. EXXON MOBIL COMPANY INDIA PVT LTD (2011-TII-68-ITAT- MUM-TP) c. BP INDIA SERVICES (2011-TII-118-ITAT-MUM-TP) d. NAVISITE INDIA PVT LTD v ITO (2013-TII-153-ITAT-DEL-TP);
(e) SONY INDIA (P) LIMITED VS DCIT (114 ITD 448)
The Ld. DR also relied upon the case of Sumitomo Chemicals India Pvt. Ltd. wherein Tribunal confirmed that companies incurring persistent losses cannot be considered as valid comparables. As regards to companies need not be Exact Comparable, as per FAR, the Ld. DR relied upon the jurisdictional High Court in the case of M/s Sony Ericson uphold the use of TNMM as the most appropriate method. The DR also relied upon the case of Deloitte Consulting India Pvt. Ltd (ITA No. 1082/Hyd/2010). As regards to comparables cannot be rejected on Account of Super Normal profits or Higher profit margins, the Ld. DR relied upon the decision of Hon’ble Delhi High Court, in case of Chrys Captial Investment Advisors (India) Pvt. Ltd. wherein the Hon’ble High Court has rejected the taxpayer’s arguments in respect of Super normal profits by holding that in the present case, this Court holds that once Brescon, Keynote and Khandwala Securities are held to be functionally similar to the assessee, they would be included as comparables, notwithstanding their high profits margins, provided that the material difference on account of such high profit margins can be eliminated under the Rule 10B(3) analysis. Same view upheld in M/s Rampgreen case by Hon’ble Delhi High Court. The Ld. DR also relied upon the decision of Delhi Tribunal in case of XCHANGING TECHNOLOGY SERVICES INDIA PVT. LTD. Vs DCIT, 2015-TII-396- ITAT- DEL- TP as well as the decision of the Hon’ble Delhi High Court in case of CHRYSCAPITAL INVESTMENTADVISORS (INDIA) PVT. LTD Vs DCIT ITA No 417/2014. The Ld. DR also relied upon the following case laws: a) Thomson Reuters India Services Pvt. Ltd. [T5-171-ITAT-2016(Bang)-TP] b) IHG IT Services (India) Pvt. Ltd [TS-476-ITAT-2015(DEL-TP] c) Synopsis India P Ltd [TS-504-ITAT-2015(Bang)-TP] d) Net Devices India Pvt. Ltd.[TS-354-ITAT-2016(Bang)-TP] e) American Express India Pvt. Ltd. [TS-349-ITAT-2016(DEL)-TP] ITAT f) NTT DATA GLOBAL DELIVERY SERVICES LTD Vs ACIT- [2016] 69 taxmann.com 7 (Bangalore-Trib) g) JDA Software India Pvt. Ltd. Vs ITO – (2016) 66 taxmann.com 327(Hyd) h) Parexel International (India) Pvt. Ltd. Vs ACIT- (2016) 66 taxmann.com 150 (Hyd) i) Ameriprise India Pvt. Ltd. Vs DCIT- (2016) 66 taxmann.com 246 (Del)
The Ld. DR relied upon the following case law which also supports the lack of correlation between Turnover and margins: i. Ariba technologies India Pvt. Ltd Vs ITO- (2016) 67 taxmann.com (Bangalore-Trib). ii. American Express Services India Ltd Vs DCIT (2013) 32 taxmann.com 143(Delhi Trib). iii. ITO Vs Nextline India Pvt. Ltd (ITA No 454 of 2011, DTF 19.10.2012 (Bang Trib). iv. 24/7 Customer.com (P) Ltd vs DCIT (2012) 28 Taxmann.com 258-. v. Trilogy E-Business Software India (P) Ltd Vs DCIT (2013) 29 taxmann.com 310-. vi. Willis Processing Services (I) (P) Ltd Vs DCIT (2013) 30 Taxmann.com 350, Mumbai, ITAT. vii. Nokia India Private Limited Vs DCIT (2014-TLL-224-ITAT-DEL-TP) viii. Maersk Global Centers (India) (P.) Ltd Vs ACIT 2014-TII-52-ITAT- MUM-SB-TP ix. Navisite India Pvt. Ltd Vs ACIT 2014-TII-249-ITAT-DEL-TP The Ld. DR further submitted that the comparable can be rejected if segmental results are not available. The Ld. DR relied upon the decision in case of AVAYA INDIA (P) Ltd Vs ADDL. CIT (2015-TII-DEL-TP), ITA No 5528/Del/2011.The Ld. DR submitted that the comparable have to be tested on various parameters and not rejected on minor differences and relied upon the decision of M/s E- Zest Solutions Ltd and M/s Techbooks International Pvt. Ltd Vs DCIT [2015- TII-282-ITAT-DEL-TP). The Ld. DR further submitted that the comparables have to be decided on Facts and not on Precedents and relied upon the decision in case of VIRAGE LOGIC INTERNATIONAL INDIA Vs JDIT {2016-TII- 378-ITAT-DEL-TP}, wherein it is held that comparability should be decided on the basis of facts and not on the basis of precedents. The Ld. DR further submitted that the comparables cannot be rejected on the basis of Turnover and relied upon the decision in case of ITO Vs GDA Software India Pvt. Ltd. [2016-TII-68-ITAT-HYD-TP] and Smart Cube India, ITA 1103/Del/2015 vide order dated 27/4/2018. The Ld. DR relied upon the following orders of the Tribunal which also support Revenue on the issue of Turnover:
Turnover cannot be relevant criteria to decide SAP Labs India [2018] 92 taxmann.com comparability unless it is Pvt. Ltd 412 (Bengaluru – Trib.) demonstrated that turnover has got an impact on profitability of a concern High or low turnover is not FIS Global [2018] 94 taxmann.com a criteria for excluding an Business India 314 (Delhi – Trib.) otherwise comparable Pvt. Ltd. company Turnover cannot be relevant criteria in a service Societe Generale sector where fixed [2016] 69 taxmann.com Global Solution overheads are nominal and 336 (Bangalore Trib) Centre Pvt. Ltd. the cost of service is in direct proportion to the services rendered Turnover cannot be relevant criteria in a service Scancafe Digital [2017] where fixed Solutions Pvt 502/Bang/2015 of ITAT, overheads are nominal and Ltd Bangalore dated the cost of service is in 12/04/2017 direct proportion to the services rendered (paragraph 17 of the decision). Comparables discharging [2015] 56 taxmann.com broadly similar functions Chryscapital 417 (Delhi)/[2015] 232 cannot be excluded merely Investment Taxman 20 (Delhi)/[2015] on the basis of high profits Advisors (India) P 376 ITR 183 or turnover, unless material Ltd. (Delhi)/[2015] 277 CTR differences on account of 137 (Delhi) the said factors is established
The Ld. DR submitted that in the case of the assessee, the entire Global group of the assessee and its AEs, in many countries, including the parent AE, have a turnover, which is comparable to the comparables to which the assessee is objecting. Therefore, the Ld. DR submitted that the argument of the assessee does not hold any ground on this issue. As regards to comparables having similar FAR are to be included, the same cannot be rejected on account of Judicial view of Court on different facts and similarly FAR is the criteria for including the comparable as held in case of M/s Cowi India Pvt. Ltd. Vs ACIT,Gurgaon [2016-TII-242-ITAT-DEL-TP]. In respect of the issue of risk adjustments, the Ld. DR submitted that the assessee has to provide reliable, robust and relevant evidence to prove that risks under one or more of the following categories were undertaken :-
• Business Risk day strategic decisions- organisation of work flow, finding solutions to logistical constraints, allocation of budget for optimal outcomes. • Manpower Risk hiring, firing, training of manpower, retention of manpower, • Technology Risk identification and sourcing of required resources • Government policy Risk, compliance with regulatory environment, coping with charges in laws and regulations, tracking and reporting on competition and market, • Political and country risk • Import related logistical risks • Market risk –Single customer risk • Service Risk –monitoring of services provided, for quality, consistency and conformity with specifications etc • Designing strategies for growth and market penetration, • Customizing and enhancing value of group intangibles on job, • Capturing the “Location savings” advantage into the business.
The Ld. DR relied upon the following decisions: a. Huawei Telecommunications (India) company (P.) Ltd. Vs Assistant commissioner of income-tax, Circle 1 (1), Gurgaon, [2015] 61 Taxmann.com 198 (Delhi-Trib) b. NXP Semi conductors India (P.) Ltd.Vs DCIT Circle 12(2), Bangalore[2015] 56 taxmann.com 140 (Bangalore-Trib.) c. Integrated Decisions & Systems (India) (P.) Ltd. Vs ITO Ward 6 (3), Jaipur [2015] 60 taxmann.com 27 (Jaipur -Trib.) d. Stryker Global Technology centre (P) Ltd DCIT(2015-TII-426-ITAT- DEL-TP) e. EXL Service. Com (India) P. Ltd Vs ACIT 2014-TII-313-ITAT-DEL-TP f. Techbooks International P. Ltd Vs DCIT 2015-TII-282-ITAT-DEL-TP g. Clena India(P) Ltd Vs ITO ward 3(3)(2015) 59 taxmann.com 92(Delhi- Trib) dt 24 April 2015, h. General Atlantic (P) ltd. Vs ACIT(OSD), Circle- 3(1) (2013) 36 taxmann.com 44 Mum Trib dt 17 May 2013 As regards to objections to comparability on account of functional difference, the Ld. DR relied upon the decision of the Tribunal in case of Deloitte Consulting India Pvt. Ltd. (ITA No 1082/HYD/2010) and the OECD guidelines which also speaks of the strength of TNMM
8. We have heard both the parties and perused all the relevant material available on record. As regards Ground No. 2 to 2.3 rejection of comparable is not just and proper. In-fact, the TPO has not taken into consideration his own parameters set out in the order. The broad comparison should have been done and the comparable selected by the assessee should have been taken into account by the TPO on the basis of his own parameters. Therefore, the submission of the Ld. AR is accepted as the TPO has not properly followed its own filters and over looked its own filter while making a final list of comparables without taking into account the functional difference of those comparables. In fact, various cases laws cited by the Ld. DR also highlight that each parameters/filters set out by the Revenue has to be taken into consideration. But in the present case the TPO failed to do so. Therefore, we remand back this issue for fresh adjudication to the file of the TPO in consonance with the observations made by us hereinabove. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Thus, Ground Nos. 2 to 2.3 are partly allowed for statistical purpose.
As regards to Ground Nos. 3 to 7 relating to the transaction for payment of testing, warranty repair and service charges fee and functions being performed by the AE in relation to the transaction under review and thereby proposing an alternative addition of Rs. 2,75,86,070/- (Firewall charges), the Ld. AR submitted that when finished goods are shipped to the AE in US from Indian ports, there is a time lag before the products reach the destined port. At times, motors capture moisture during the transit period and this can adversely impact their functioning. The moisture in the motor may cause sparking at the time of usage and can cause harm to the user. On the request of MEIPL, the AE engages a third party that tests all the motors to ensure the desired quality standards of the US market. In order to determine whether all motors meet the desired quality standards, each motor needs to be tested individually. Such testing charges incurred are paid by MEIPL to the AE which the AE pays to the third party on cost-to-cost basis i.e. MEIPL paid directly to AE exactly the same amount which the AE paid to the third party performing the testing services (without any mark-up). Since the payment of firewall charges was made by the Assessee to its AE was an integral part of the manufacturing function, the same was aggregated and benchmarked using the TNMM as the most appropriate method. It was also corroborated using CUP method as mentioned above. During the assessment proceedings, the Ld. TPO asked the Assessee to submit the reason as to why the payment of ‘firewall charges’ to the AE should not be considered ‘Nil’. The Assessee filed its replies on various dates in each assessment year as to why the transaction should be considered at arm’s length. The TPO rejected the arguments put forth by the Assessee by stating the following reasons: a. An unrelated party would not make such a payment; b. If the AE wishes to test all the motors for its satisfaction, then it amounts to duplicative service and no separate payment is required to be made by the Assessee; c. No unrelated party would make payment for testing of motors in which no fault is detected; d. No independent party would pay such testing charges when goods are covered by warranty; and e. TPO has correctly applied the CUP method for benchmarking the subject transaction.
Further, the DRP has not given any detailed finding or justification for rejecting the Assessee’s contentions. It accepted the approach followed by the TPO and made adjustment on account of firewall charges. The Ld. AR submitted that the TPO / DRP has grossly erred in not appreciating the nature and importance of this transaction. By seeking such answers from the assessee, the TPO / DRP has ignored the following points which are the primary reasons for which the Assessee is incurring such expense:
(i) Impact on the brand reputation: It is important to understand that the main reason behind incurring such expenses is to ensure that none of the motors are defective when sold to the customer in the overseas market. It is pertinent to note that the product liability risk, in a value chain, is that of a manufacturer. Since in the instant case, MEIPL is the manufacturing entity, any defect in the product will have a detrimental effect on the brand reputation of MEIPL. In case any defect is identified in the goods which are being sold in the US market, the reputation of MEIPL would be impacted and not that of the distributor as the distributor is earning a gross margin by just rendering distribution services. Adverse brand reputation would lead to drastic reduction in sales in subsequent years and hence the profitability of the assessee.
(ii) Penal charges: It is important to understand that US being the most developed country in the world has the most stringent laws against the damages caused by the use of faulty/ defective items. A company could even face trial for providing faulty products. In the instant case, if the motors supplied by MEIPL to the customer is used in a building and due to a short circuit in the motor (because of the moisture) it catches fire, then this could lead to huge product liability claims been initiated against the manufacturer i.e. MEIPL and not the distributor. The assessee could also face trial for the same apart from huge damages claim which will impact the overall reputation/ functioning of the assessee.
(iii) Cost to cost charges: An important point which must be considered while evaluating arm’s length nature of this transaction is that, on request of MEIPL, the AE appoints the third party that performs unpacking, testing and repacking of motors. The cost of such activities is borne by the AE which then recovers exactly the same from MEIPL i.e. without charging any mark-up. In other words, this is a cost to cost reimbursement and hence the AE has not benefitted anything from this arrangement. These motors ought to have been tested in US only and could not have happened in India (as testing is performed to check moisture in motors during transit). If testing was possible in India, MEIPL would have directly appointed the third party. In this case, since the AE is familiar with the US market, has appointed this third party for the purpose of testing. Back to back invoices have already been submitted by the assessee to the Ld. TPO / Ld. DRP (on full back-up in AY 2008-09).
Cost not related to AE: The Ld. AR stated that the AE is a (iv) distributor of goods which are manufactured by the assessee. It has also been stated before the lower authorities that the AE retains only 10% of revenue and the balance is remitted back to the assessee. Hence, the profit is that of the assessee with limited returns to the AE – a gross margin of 10%. Under these circumstances it that the AE would not bear such expense of testing when it is earning only minimal returns. Should the AE start to bear these expenses it’s margins would take a hit. In any third party set-up such costs can never be passed onto the distributor.
The Ld. AR also submits its contentions against the grounds raised by the TPO as to why such testing is required and how different it is to warranty and other expenses. The Ld. AR further submitted that the TPO has compared this expense with warranty expenses. It is true that assessee provides warranty, but this expense is separate and distinct to firewall charges. Any motor that does not contain moisture may also have functional problems (i.e. other problem relating to functionality of the motor) because of which MEIPL could bear the warranty charges. But it is the responsibility of the assessee to provide the motors in working conditions. It is also important to point out that if products are sold without testing, it can lead to extra claims on warranty – which not only is economically non-viable but also impacts reputation of the company’s brand. The TPO has also stated that this is a duplicative service. Again, the TPO/ DRP has not appreciated or understood the nature of the transaction. This testing can never be done in India as the purpose is to check faults due to moisture while still in transit. It is beyond the understanding how this can tantamount to duplication. The TPO has mentioned that ‘no third party’ would incur such expenses in which no fault is detected. While saying this, the TPO has not given any reference to any third party not incurring such expense. It is apparent, that fault or no fault in the motors can only be determined once all the motors are tested. Hence this argument is also flawed. Further, the assessee believes that it is the responsibility of the manufacturer to provide goods in working conditions to its distributor. Hence all third-party manufacturers are likely to incur such expenses. The Ld. AR also submits that this is a genuine business expenditure. Any expenditure thus incurred wholly and solely for the purpose of the business of the assessee cannot be disallowed or questioned by the Revenue. The way assessee conducts its business is purely the call of the taxpayer and not the Revenue. The Revenue cannot question the commercial wisdom of the assessee. Case laws pertaining to this are enclosed below:
• High Court’s ruling in the case of EKL Appliances Ltd. (I.T.A. Nos.1068/2011 & I.T.A. Nos.1070/2011)
• Keihin Panalfa Ltd. vs ACIT (ITA No. 1790 & 1201/Del/2014);
• Globe Ground India Pvt. Ltd. vs DCIT (ITA No. 2785/Del/2014);
• Bain & Company India Private Limited(ITA No. 378 & 379/Del/2015 & CO 275 & 276/Del/2015);
• Sabic innovative plastics India Pvt. Ltd. (ITA No. 1125/Ahd/2014) and (ITA No. 427/Ahd/2016);and
• Dresser-Rand India Pvt. Ltd. vs ACIT (ITA No. 8753/Mum/2010).
The Ld. AR further pointed out that the AE is merely acting as a distributor. The distributor is never liable for the goods manufactured. Entity bearing the responsibility of the goods and earning profits on account of sales of goods, is expected to bear the costs as well. The TPO has further rejected the aggregation approach and benchmarked the transaction using CUP method. In this regard, the Ld. AR submits that subject transaction is interlinked with the primary transaction. However, without prejudice to the above, even if the approach of the TPO is to be selected, the assessee furnished third party invoices which represented CUP for the subject transaction. However, the TPO ignored the same and determined the value to be ‘Nil’ without identifying a single comparable. In relation to the same, the Appellant wishes to rely on the following judicial rulings, wherein it has been held that it is imperative to have a Comparable uncontrolled transaction. Case laws pertaining to this are as follows:
• Unitta India Company Private Limited (ITA No. 2745/Chny/2017)
• SNF (India) Pvt. Ltd. (ITA No. 279 & 280/VIZ/2017)
• Triniti Advanced Software Labs Pvt. Ltd. (ITA No. 1427/Hyd/2014); • Spencer Stuart (India) Private Limited (ITA No. 7117/2012, 1680/2014, 922/2015 and 1832/2016) • Judgement of the ITAT in assessee’s own case for AY 2007-08 and AY 2009- 10 in and ITA No. 1060/Del/2014 vide order dated 19th February 2020
The Ld. DR relied upon the Assessment order and the order of the TPO as well as the directions of the DRP.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the payment for the functions performed by the AE in respect of testing, warranty, repair and service charges fee in relation to the transactions and the Assessing Officer proposed and alternative addition to Rs. 2,75,86,070/- (Firewall charges), this issue is decided in assessee’s own case for Assessment Year 2007-08 & 2009-10 vide order dated 19/2/2020. The Co-ordinate Bench of the Tribunal held that motors were required to check for contempt of moisture required in transfer from India to USA i.e. the destination point and it was the responsibility of the assessee to provide defect free motors to the end customers. Therefore, the same was deleted accordingly by the Tribunal. In the present case also, the testing, warranty repair and service charges fee were the functions performed by the AE and thus they are the expenditure incurred by the assessee, while paying it to the AE. Therefore, Ground No. 3 to 7 are allowed.
As regards to Ground Nos. 8 and 9 relating to denial of assessee’s claim of deduction u/s 10B of the Act amounting to Rs. 1,84,86,800/- in respect of newly established 100% Export Oriented Unit (EOU), the Ld. AR submitted that the assessee has started a new export oriented unit for manufacturing of washer motor in FY 2002-03. In respect of such unit, the assessee has claimed deduction of INR 1,84,86,800 u/s 10B of the Act. In AY 2008-09, Assessing Officer without providing any reasons for disallowance, just by relying on the orders of previous years, held that EOU is just an expansion of existing unit and not an integrated new unit. In view of same, the Assessing Officer disallowed the claim u/s 10B of the Act. Since the similar addition was made by the Assessing Officer in the previous year and the same was confirmed by the DRP, therefore DRP without providing any reasons affirmed the decision of Assessing Officer. The Ld. AR submitted that the issue of allowance of deduction u/s 10B of the Act has been evaluated by Tribunal and allowed vide order dated 26 March 2019 for AY 2003-04 & AY 2004-05. Thereafter same has also been allowed in AY 2005-06, AY 2006-07, AY 2007-08 and AY 2009-10 basis order of AY 2003-04 and AY 2005-06. The Ld. AR submitted that eligibility condition to claim deduction u/s 10B of the Act have to be fulfilled in initial year and thereafter deduction has to be allowed for 10 years. In this regard reliance can be placed on decision of Hon’ble Delhi High Court in case of CIT v. Tata Communications Internet Services Ltd. [2012] 204 Taxman 606/17 taxmann.com 241 (Delhi), it was clarified by the Hon’ble High Court Court with specific reference to Section 80-IA which is pari materia with section 10B that "the bar as provided under section 80-IA(3) is to be considered only for the first year of claim for deduction under section 80-IA" The Ld. AR also relied upon decision of Ahmadabad Tribunal in case of DCIT v Tyco Valves & Control India (P.) Ltd.[2013] 33 taxmann 223 as well as the Hon’ble Karnataka HC in case of Ace Multi Axes Systems Ltd. v. Dy. CIT [2014] 367 ITR 266 dealing with issue of deduction u/s 80IA in subsequent years. The Ld. AR also relied upon the decision of the Hon’ble Delhi High court in case of CIT v International Tractors Ltd.[2017] 84 taxmann 132, wherein the Hon’ble High Court rejected revenue’s plea that assessee need to fulfill conditions of 80IA in each of the subsequent years. Thus, the Ld. AR submitted that the issue of allowance of 10B has already been decided in first year of claim i.e. AY 2003-04 & AY 2004-05 by the Tribunal in favor of assessee and thereafter allowed in AY 2005-06, AY 2006- 07, AY 2007-08 and AY 2009-10 also, by placing reliance on its previous order for AY 2003-04 and AY 2004-05. Since eligibility of deduction u/s 10B has to be evaluated in the initial year only, therefore deduction u/s 10B shall be allowed in the AY 2008-09.
The Ld. DR relied upon the assessment order.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the issue of allowance of claim of deduction of 10B was already decided in first year i.e. Assessment Year, 2003- 04 as well as 2004-05, 2005-06, 2006-07, 2007-08 and 2009-10 as well. As per the provisions of Section 10B, the assessee is entitled for deduction u/s 10B, in respect of a new export oriented unit for manufacturing of washer motors in Financial Year 2002-03. The Tribunal held as under:
AY 2007-08 and AY 2009-10 “4.2 We have heard the rival submissions of the parties and perused the relevant material on record. In the year under consideration, the Assessing Officer relying on the order of the immediately preceding year held that Export Oriented Unit (“EOU”) is just an expansion of the existing unit and not an integrated new unit. The learned DRP also upheld the same. We find that the Tribunal in and 1196/Del/2010 for assessment years 2005-06 and 2006-07 respectively, following the earlier order deleted the disallowance of deduction under Section 10B of the Act observing as under:
“4. We have gone through the order dated 26.03.2019 passed in assessee’s own case for the AY’s 2003-04 and 2004-05 in the appeals preferred by the revenue, wherein in respect of the claim of deduction u/s 10B of the Act, a coordinate bench of this Tribunal found that by applying the decision of the Hon’ble Apex Court in the case of Textile Machinery Corporation Ltd. Vs. CIT, 107 ITR 195 (SC) learned CIT(A) had rightly extended the relief to the assessee u/s 10B of the Act and, therefore, the revenue cannot have any grievance against the same. It is not the case of the revenue that any appeal was preferred against the order or that this position was disturbed.
5. It is not the case of Revenue that there is any change of facts and circumstances involved in this case to taken a different view. We, therefore, while respectfully following the view taken by the coordinate bench in assessee’s own case for the earlier Asstt. Years hold that the assessee is entitled to the relief u/s 10B of the Act.”
4.3 Since in the year under consideration, the Assessing Officer has followed the earlier years’ order, therefore, the issue in dispute being squarely covered by the decision of the Tribunal (supra), we delete the disallowance. The grounds of appeal of the assessee from ground nos. 1 to 8 are accordingly allowed.”
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7. In the grounds raised also there are two issues involved, i.e., is transfer pricing adjustment and disallowance of deduction under Section 10B of the Act. We have already adjudicated both the issues in the foregoing paras in (AY: 2007-08). The facts and circumstances of the case in ITA No 1060/Del/2014 (AY: 2009-10) are identical to the facts and circumstances of the case in ITA No. 5257/Del/2011 (AY: 2007-08)
Thus, to have consistency in our decision, following our findings in assessment year 2007-08, grounds raised by the assessee on both the issues are allowed mutatis mutandis. In the result, the appeal of the assessee is allowed.”
AY 2005-06 and AY 2006-07 “41. So, in view of what has been discussed above, we are of the considered view that by applying the decision rendered by Hon'ble Supreme Court in Textile Machinery Corporation Ltd. (supra) and the case laws discussed in the preceding paras, the Id. CIT (A) has rightly extended the relief to the assessee u/s 10Bof the Act. Consequently, Ground No.I& Additional Ground Nos.13 TO 16 of and Ground No. 1 OF ITA No.3649/Del/2009 are determined against the Revenue.”
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“4. We have gone through the order dated 26.3.2019 passed in assessee's own case for the AYs 2003-04 and 2004-05 in the appeals preferred by the revenue, wherein in respect of the claim of deduction u/s 108 of the Act, a coordinate bench of this Tribunal found that by applying the decision of the Hon'ble apex court in the case of Textile Machinery Corporation Ltd. vs CIT, 107 ITR 195 (SC) Id. CIT(A) had rightly extended the relief to the assesseeu/s 108 of the Act and, therefore, the revenue cannot have any grievance against the same. It is not the case of the revenue that any appeal was preferred against the order or that this position was disturbed.
It is not the case of Revenue that there is any change of facts and circumstances involved in this case to take a different view. We, therefore, while respectfully following the view taken by the coordinate bench in assessee's own case for the earlier Asstt. Years hold that the assesseeis entitled to the relief u/s 10Bof the Act”
The facts are identical and this assessment year is coming under the 10 consecutive years, therefore, the assessee is right in claiming the deduction under Section 10B of the Act. Thus, Ground No. 8 & 9 are allowed.
In the result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on this 27th Day of November, 2020.