GE INDIA INDUSTRIAL PRIVATE LTD.,GURGAON vs. DCIT, NEW DELHI

This appeal by the assessee is preferred against the order dated NIL framed u/s 143(3) r.w.s 144C of the Income tax Act, 1961 [hereinafter referred to as 'the Act' for short] pertaining to ay 2011-12.

In addition to the above, the assessee has also contested domestic issues which related to: a) Disallowance of warrantee and replacement expenses; b) Disallowance of claim of bad debts written off; c) Denial of depreciation of Written Down Value [WDV] of software expenditure; and d) Denial of depreciation of WDV of expenditure incurred on purchase of business rights

Representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides.

In addition to the oral arguments, the representatives of both the sides have also furnished written submissions which have been duly considered.

Facts on record show that during the year under consideration, ‘GEIIPL’, the appellant, was engaged in the following activities :

The international transactions were referred for determination of arm’s length price to the TPO and the TPO proposed an adjustment of Rs. 46,82,16,277/- in respect of certain international transactions of some of the divisions of the appellant company vide order dated 30.01.2015. Accordingly, the AO framed draft assessment order against which the assessee filed objections before the Dispute Resolution Panel [the ‘DRP’ for short] and the DRP issued its directions vide order dated 29.12.2015. Finally, the AO issued the final assessment order in accordance with the directions of the DRP vide order dated 28.01.2016.

We will first address to the issues relating to TP adjustment in some of the divisions of the appellant.

In this division, the appellant is engaged in distribution of power quality products, such, as Uninterruptible Power Supplies (UPS), batteries and relays. In this division, the bone of contention is the claim of adjustment on account of higher import cost. The assessee claims that percentage of total imports to total purchases of the assessee are 67.97% whereas for comparable companies, the average total imports to total purchases is 20.66%. It is the claim of the assessee that even Rule 10B(3)(ii) of the Income Tax Rules, 1962 (Rules, in short) states that reasonably accurate adjustments are to be undertaken to iron out the differences that materially affect the price or cost charged or paid or profit arising from such transactions in the open market.

Per contra, the ld. DR contends that what is mentioned in the Rules is ‘comparable’ and not ‘identical’. Therefore, any adjustment would distort the comparabilities. It has been contended by the Revenue that any adjustment, if any, need to be carried out, are to be carried out in the comparables and not in the tested party.

It is the say of the ld. counsel for the assessee that the DRP had stated that custom duty would be balanced out by not having to pay Excise Duty on the domestic production. The ld. counsel for the assessee, drawing our attention to the decision of the co-ordinate bench in the case of Honda Motor India Private Limited [I.T.A .Nos.

We find that this division is distribution division and comparable companies are also distributors and therefore, there is no question of any Excise Duty. We find that the DRP has stated that the assessee had failed to furnish the data and substantiate its claim for adjustment. We do not find any force in this observation of the DRP.

It can be seen from the aforementioned calculation percentage of imports to total cost purchases in the case of the appellant is 67.97% as against 20.66% in the case of the comparables, which means that the assessee is subject to higher imports at 47.31%. In our considered opinion, on the given facts, the assessee should get benefit of adjustment on account of higher imports.

The claim of the ld. DR that any adjustment should be made in the case of comparables and not in the hands of the tested party cannot be accepted because the co-ordinate bench in assessee’s own case in for A.Y 2004-05 allowed adjustment on account of high raw material cost to the margins of the assessee.

Considering the facts mentioned hereinabove, in the light of findings of the co-ordinate bench [supra], we direct the Assessing Officer/TPO to allow adjustment on account of higher import cost and decide the issue afresh.

Since we have directed for allowance of adjustment on account of higher import cost, we do not find it necessary to allow adjustment with regard to working capital in this division.

In this division, an adjustment of Rs. 4,79,51,479/- has been made by not granting comparability adjustment in respect of rise in cost of raw materials, not granting comparability adjustment in respect of underutilization of capacity and not granting adjustment for varying levels of working capital employed and treating provisions no longer required written back by the assessee as non-operating in nature.

In this division, the assessee is engaged in manufacturing of low voltage electrical products for sale to its customers. These products include MCCB, fuse gear, control gear, switches, capacitors, MCB and ACB.

Before the TPO, the assessee had claimed adjustment with regard to rise in price of raw materials and adjustment on account of under utilisation of capacity. Claim of underutilisation of capacity was rejected by the TPO on the ground that during the year, the assessee has increased its installed capacity from 300 panels to 700 panels and as the assessee is a captive center of its AE, the AE had decided to increase the capacity expecting the business and should have compensated the assessee in case of no business. According to the TPO, when the AE has not granted any adjustment, the assessee should not expect any adjustment in TP audit.

The DRP confirmed the findings of the TPO.

Before us, the ld. counsel for the assessee once again drew our attention to the decision of the co-ordinate bench in [supra] and pointed out that the raw material adjustment was allowed on account of significantly high consumption of raw material.

In so far as this adjustment is concerned, we have already extracted the relevant findings of the co-ordinate bench at para 14 hereinabove. In view of the above, we direct the Assessing Officer/TPO to allow adjustment on account of high raw material consumption.

In so far as adjustment on account of under utilisation of capacity is concerned, we find that capacity utilisation by the assessee is 43% whereas comparable companies are working at an average capacity of 53.58%. In our considered opinion, this wide variation mandates appropriate adjustment to iron out differences between the assessee and comparable companies.

Observation of the lower authorities that the assessee is a captive center for its AE seems to be incorrect. We find that total revenue of the Power Control Division is Rs. 2,08,46,83,619/-, whereas the sales made to the AEs are only Rs. 17,14,01,378/-which makes it to 8.22% of total sales. Thus, it can be seen that the assessee is not a captive center for its AE. In light of the above facts, we direct the AO/TPO to allow adjustment on account of underutilization of capacity.

Since we have directed for allowance of higher raw material consumption and under utilisation of capacity, we do not find it necessary to dwell into the claim of working capital adjustment.

Another claim in this division is that the provisions no longer required written back by the assessee were treated as non-operating by the TPO. We find that the treatment given by the TPO is based upon Safe Harbour Rules. In our considered opinion, Safe Harbour Rules are not applicable for the year under consideration as they were introduced on 18.09.2013, which means that these provisions were not in existence at the time of preparation of the TP documentation. The Hon'ble High Court of Delhi in the case of Fiserv India Private Limited 17/2016 has held that Safe Harbour notification dated 18.09.2013 is prospective. In light of the above, we do not find any reason why the provisions written back should not be treated as operating in nature. We direct accordingly.

In this division the assessee has challenged the ALP adjustment of Rs.2,87,41,969/-.

Facts on record show that in BNSS division, the assessee is engaged in provision of software development services to its AEs.

We find that these companies were accepted as functionally comparable with the appellant and only because of different F.Y., these companies were disregarded by the TPO/DRP. In our considered opinion, where the audited quarterly results are available in the public domain, there should not be any difficulty in making necessary adjustment in respect of quarterly results and making accounting year similar to that of the assessee. This principle has been accepted in a catena of decisions by the co-ordinate benches. To name a few:

We accordingly, direct the TPO to consider the quarterly results and work out proportionate profit margin. The assessee is directed to furnish necessary details and the TPO is directed to verify the same.

The other dispute relates to inclusion of Infosys technologies Ltd and Acropetal Technologies Ltd. The main contention of the assessee is that these companies were included by cherry picking, which is against the rule of the Tribunal in the case of Toshiba India Ltd 3175/DEL/2007 wherein it has been held that ALP must be determined by a systematic approach and cherry picking of comparables is not acceptable.

Moreover, the Hon'ble High Court of Delhi in the case of Agnity India Technologies Pvt Limited in has held that Infosys Technologies Ltd cannot be compared to software service companies, as Infosys is engaged in the trade marked products and investment in product research and development centre has brand value and has substantial expenditure on R&D activities and is also engaged in the sale of software products and segment for software services is not available.

In fact, the company’s segments are based on industries and geography and not activities. For these reasons, the Hon'ble High Court of Delhi in the case of Agnity India Technologies Pvt Ltd[supra] has directed for exclusion of Infosys Technologies from the final set of comparables. For similar reasons, we direct the Assessing Officer/TPO to exclude Infosys Technologies from the final set of comparables.

In so far as Acropetal Technologies Ltd is concerned, this company is engaged in the business of engineering design services, healthcare services, enterprise and IT services, energy and environment services, IT infrastructure management services and IT consultancy services.

As per the annual report of this company, engineering design services span across the entire product development. This company has implemented several healthcare case management and patient information system that merge sophisticated technology with user- friendly interfaces. This company also provides end to end solutions in many areas. The annual report further states that this company is committed to deliver cost-effective software products, services and solutions to its customers.

A careful perusal of the annual report of this company suggests that this company is software product company and hence, cannot be compared to the appellant. In light of the facts discussed hereinabove, we direct for exclusion of this company.

In this division, the assessee has challenged the adjustment of Rs.5,17,67,019/-. The main contention before us is that no adjustment for payment of extraordinary expenses in the nature of provision for Sales Tax, rent, gratuity, payment of consultancy charges, liquidating damages were provided for adjustment. In this division, the assessee sells locomotive parts, turbochargers and railway signalling equipment in India. The assessee imports locomotive parts, turbo parts and signalling panels from its affiliates in US. The locomotives are sold directly by the assessee to customers India whereas the company assembles Turbo kits into turbochargers in its assembly facility before selling turbochargers finally to its customers. Before the TPO/DRP the assessee has claimed the adjustment on account of extraordinary expenses. The TPO rejected the claim on the ground that these are expenses in relation to business operations.

Before us, the learned counsel for the assessee pointed out that TPO himself has provided adjustment in F.Y 2006–07.Therefore, there should not be any reason for denying similar adjustment for the year under consideration.

In our considered opinion, if working capital adjustment brings parity in comparability and case strength to comparability, we do not find any reason why the same should be denied. All that the TPO has to do is to satisfy himself with the working of the adjustments and point out issues of his dissatisfaction. We, accordingly, direct the AO/TPO to consider the working of the adjustments to be furnished by the assessee and decide the issue afresh. We order accordingly.

In this division, adjustment of Rs.78,71,916/- is contested by the assessee. The main contention is that no adjustment was given with regard to high import content and further no adjustment was given for varying levels of working capital employed by the assessee vis-a-vis comparable companies.

In so far as adjustment on account of higher import is concerned, we have already decided this issue at para 14.For our detailed reasoning given therein, we direct the AO/TPO to allow adjustment on account of higher import. Since the adjustment on account of higher import is directed to be allowed, we do not find it necessary to allow benefit of working capital adjustment.

In this division, the assessee manufactures specialty chemicals more specifically, water treatment chemicals and pulp and paper product chemicals. In this division, the assessee has challenged adjustment of Rs.2,33,47,148/-. The challenge of the assessee relates to not providing comparability adjustment of scrap sales and not granting working capital adjustment.

The assessee further contends that operating margin of comparable companies is incorrectly computed. In so far as adjustment on account of scrap sales is concerned, the same has been denied on the ground that adjustment cannot be carried out on the margins of the assessee. This issue has been elaborately discussed by us in para 15 wherein we have referred to the findings of the coordinate bench. In same lines, we direct the AO/TPO to allow adjustment on account of scrap of sales.

In so far as incorrect computation of operating margin of comparable companies is concerned, we find that the DRP had directed the AO/TPO to make necessary corrections, which have not been carried out by the TPO. We, accordingly, direct the TPO/AO or to carry out the directions of the DRP.

MSD is engaged in providing marketing support services to majority of businesses within GE, classified under Energy Infrastructure and Technology Infrastructure. MSD provides marketing support services exclusively to its AEs.GBS is an administration support services provider. It is engaged in providing these services only to its domestic and foreign AEs. In this division, ALP adjustment of 26,01,40,955/- has been contested by the assessee.

At the very outset, we have to state that out of 19 comparable companies selected by the assessee in its TP study, 18 comparables were rejected by the TPO. This itself shows that the TP study in this division was flawed. The main reason for rejecting the comparables given by the TPO is that these comparables were mainly engaged in providing security services or travel related services etc which are not at all comparable to those segments of the assessee which is broadly an administrative service segment. Since the 18 comparables were rejected by the TPO and only one valid comparable survived, the TPO had no choice but to work out the ALP on the basis of fresh search.

Before us, the assessee has challenged the inclusion of the following comparables:

TSR Darashaw Limited In his written submissions, the learned counsel has reiterated what has been contended before the TPO/DRP.

We have carefully gone through the written submissions. We do not find any force in the claim of the assessee. On a perusal of the annual report of TSR Darashaw Ltd, we find that this company is engaged in the activities of payroll management, traditional registry service and record management activity, which are functionally administrative and management activities and, therefore, functionally comparable. On the contention of the assessee that this company is engaged in development of software, we find that the development of software is in the final phase of launching and hence do not have much relevance for the year under consideration. We, therefore, do not find any error or infirmity in the inclusion of this company. This company will remain in the final set of comparables.

APTICO LIMITED

Referring to the income from operations of this company, the learned counsel pointed out that Apitco Ltd is not rendering market support services but is engaged in the provision of technical and engineering consultancy services. We do not find any force in this contention of the learned counsel. Income from operations of this company is as under:

A perusal of the above shows that this company is not into engineering type of service but is a consultancy entity. The revenue from nature of services are evident from figures given hereinabove.

The annual report of this company suggests that this company is indirectly held by the government as Export Import Bank, which is a public financial institution, holding more than 25% of the subscribed capital of this company and as per section 224A of the Companies Act, 1956, such company has to appoint auditors as per special resolution, which has been followed by this company. Being a public sector undertaking itself is a strong ground for exclusion of this company from the final set of comparables. We direct accordingly.

Another contention of the ld. counsel is that there is an arithmetical error in the margin of concept communications for which the DRP has issued necessary directions but have not been followed by the TPO. We accordingly direct the TPO to give effect to the directions of the DRP.

The learned counsel has further brought to our notice that after change in remuneration policy from cost +5% to cost +25% market transactions in MSD and oil and gas division are at arms length. It is the say of the learned counsel that if the TPO/AO take cognizance of the increased mark up, there would not be any adjustment in respect of these business divisions.

We are of the considered view that if there is change in the remuneration policy by which cost +5% mark-up is increased to cost +25% mark-up, the TPO/AO must examine this change in the remuneration policy and, if found correct for the year under consideration, the same may be given effect to and the ALP adjustment should be decided afresh accordingly.

To sum up, for the sake of repetition, the assessee is engaged in rendering marketing support services and companies undertaking similar business operations are not available in the public domain.

Under technical support sensing and inspection technology division, service engineers are sent to customer locations in India to provide technical support services. Technical services provided to AEs thus include installation, product clarification and break down/ maintenance visits. Under technical transportation division, the assessee provides technical support or warranty support in relation to GE transportation products on behalf of the AEs and under technical support oil and gas division, the assessee analyses technical and material Non-conformities coming from the sites and classify and prioritise them.

At the very outset, the learned counsel for the assessee referred to the chart of comparable companies as Annexure -I and pointed out that these companies should have been included because they are performing similar functions as by two comparable companies considered by the TPO. It is the say of the learned counsel that the claim of the assessee has not been properly appreciated by the DRP/TPO.

We have carefully considered the chart as referred by the learned counsel. We find that almost all comparable companies have been rejected on the basis of functional dissimilarity or on the basis of some filters. In our considered opinion, it would be in the interest of justice to revisit the comparabilities of these companies as per analysis given by the assessee in the following charts:

The TPO is directed to re-examine the issues raised by the assessee hereinabove and decide the issue afresh after giving reasonable opportunity of being heard to the assessee.

While scrutinising the return of income, the assessing officer noticed that the assessee has debited Rs.3,28,17,167/- to the profit and loss account under the head ‘Warranty and Replacement Expenses’. The assessee was asked to show cause as to why this provision should not be disallowed.

In its reply, the assessee strongly contended that warranty costs are estimated by management on the basis of technical evaluation of and past experience. It was explained that provision is made for estimated liability in respect of warranty cost in the year of sale.

The assessing officer rubbished the claim of the assessee stating that the assessee has not given any documents to prove that the provision is based on scientific working. The AO further observed that similar view was taken in A.Y 2008-09,2009-10 and 2010-11.

Objections raised before the DRP were similarly dismissed.

Before us, the learned counsel for the assessee reiterated what has been stated before the lower authorities.

Per contra, the ld. DR strongly supported the findings of the assessing officer.

We have given careful consideration to the orders of the authorities below. It is not in dispute that similar disallowances were made in A.Y 2006–07 and 2007–08 and the matter travelled up to the Tribunal and the coordinate bench in and 2749/A/11 has considered this dispute vide ground No. 3 of that appeal. The relevant findings of the coordinate bench read as under:

In light of the findings given by the coordinate bench [supra] we direct accordingly. Ground No. 14 is allowed for statistical purposes.

Ground number 15 relates to disallowance of claim of bad debts written off.

While scrutinising the return, the Assessing Officer noticed that the assessee has written off bad debts amounting to Rs.6,94,01,066/-.

In its reply, the assessee stated that these debts are actually written off and strong reliance was placed on the case of TRF Limited in Civil Appeal No. 5293 and 5294 of 2003.

The assessee was further asked to furnish details of income accounted for two amount claimed as return off. On a perusal of the details, the Assessing Officer noticed that the assessee could furnish only details in respect of Rs.5,35,56,246/-. The Assessing Officer, accordingly, disallowed the balance of Rs.1,58,44,820/-.

When objections were raised before the DRP, the DRP directed the AO to examine the facts and allowed the claim to the extent allowable u/s 36(1)(vii) of the Act. Accordingly, fresh notice was issued to the assessee and once again was asked to furnish details and after again perusing the details, the AO finally came to the conclusion that the assessee could not explain the write off amounting to Rs.1,50,93,959/- and made addition.

Before us, the learned counsel for the assessee drew our attention to the documents exhibited in the paper book and pointed out that the assessee had furnished complete details which have not been properly appreciated by the assessing officer. It is the say of the ld. counsel for the assessee that the assessee has fulfilled all the conditions specified u/s 36(1)(vii) read with section 36(2) of the Act and pleaded that actual write off of debts should be allowed.

Per contra the ld. DR supported the findings of the Assessing Officer.

We have carefully considered the orders of the authorities below and the submissions made by the ld. representatives. We have also perused the relevant documentary evidences referred to by the learned counsel which are exhibited in the paper book. In our considered opinion, if the debts are actually written off from the books, the ratio laid down by the Hon'ble Supreme Court in case of TRF [supra] squarely applies, which is also acknowledged by CBDT in its Circular No. 551 dated 22.012019. Once the debts have been actually written off, the same has to be allowed. We, accordingly, direct the Assessing Officer to delete the addition ofRs.1,50,93,959/-. Ground No.15 is, accordingly, allowed.

Ground No. 16 relates to disallowance of claim of advances written off.

The Assessing Officer noticed that the assessee has claimed Rs.80,39,243/- as advances written off. The assessee was asked to furnish the complete details. The assessee furnished the details which were dismissed by the assessing officer. The Assessing Officer was of the opinion that the assessee has not submitted any factual details of such advances written off, that is, party wise break up, purpose of advance, date and year of such advance made and why the same has been written off. The assessing officer was of the further belief that such a write off of advances are in the nature of debts and therefore, the same has to be considered in the light of section 36(1)(vii) read with section 36(2) of the Act. The Assessing Officer made an addition of Rs. 80,39,243/-, which was confirmed by the DRP.

Before us, the learned counsel for the assessee drew our attention to the details of advances written off which are exhibited in the paper book. It is the say of the ld. counsel that advances are in the nature of trade advances, which were made in regular course of business and since advances were found to have become irrecoverable, the same were written off.

Per contra, ld. DR supported the findings of the Assessing Officer.

We have carefully considered the issue. A perusal of the relevant pages exhibited in the paper book shows that these advances were in the nature of trade advances, which were made in regular course of business and were given to suppliers in the normal course of business and some are earnest money deposits and some are guarantee deposits, which were furnished in furtherance of business of the assessee. In our considered opinion, such advances being directly related to the business activities of the assessee, write off of the same should be allowed. We accordingly direct the Assessing Officer to delete the addition of Rs.80,39,243/-. Ground No. 16 is, accordingly, allowed.

Ground Nos. 17 and 18 relate to the claim of depreciation@ of 60% on WDV of software and 25% on WDV of capital expenditure. We find that the DRP has given a categorical direction to the Assessing Officer to allow depreciation on WDV. However, we find that the TPO has not followed the directions of the DRP. In our considered opinion, directions of the DRP are mandatory for the Assessing Officer and the Assessing Officer should have followed the directions. We, accordingly, direct the Assessing Officer to follow the directions of the DRP and allow claim of depreciation. Ground Nos. 17 and 18 are, accordingly, allowed for statistical purposes.

The only grievance which remains to be adjudicated is that the Assessing Officer has not granted self-assessment tax. We direct the Assessing Officer to allow credit of self-assessment tax as per provisions of the law.

In the result, the appeal filed by the assessee in allowed in part for statistical purposes.