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Income Tax Appellate Tribunal, BANGALORE BENCHES : “A”, BANGALORE
Before: SHRI N.V.VASUDEVAN & SHRI A.K.GARODIA
IT(TP)A No.1350 & 1251(B)/201 1
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES : “A”, BANGALORE BEFORE SHRI N.V.VASUDEVAN, VICE PRESIDENT AND SHRI A.K.GARODIA, ACCOUNTANT MEMBER
Sl. IT(TP)A Nos. Asst. Year Appellant Respondent No. 1 No.1350(B)/2011 2007-08 M/s TE Connectivity ACIT, Circle -2, India Pvt.Ltd.,TE Park (LTU) 22B,doddenakundi, II Bangalore Phase, Industrial Area, Whitefield, Bangalore-560 048 PanNo.AAAGE4623J 2 No.1251(B)/2011 2007-08 -do- do- Appellant by : Shri Sumeet Khurana, CA Revenue by : Ms.Neera Malhotra, CIT-DR Date of hearing : 13-02-2020 Date of pronouncement : 19-02-2020
O R D E R PER SHRI N.V.VASUDEVAN, VICE PRESIDENT : IT(TP)A.No.1350(B)/2011 is an appeal by the assessee against the final assessment order dated 24-10-2011 passed by the ACIT, (LTU) Bangalore u/s 143(3) r.w.s.144C(13) of the It Act, 1961 (Act) in relation to assessment year 2007-08
IT(TP)A No.1251(B)/2011 is also an appeal by the assessee against the final order of assessment dated 30-09-2011 by the DCIT, Circle-12(4)
IT(TP)A No.1350 & 1251(B)/201 2 Bangalore u/s 143(3) r.w.s. 144C of the IT Act, 1961 (Act) in relation to assessment year 2007-08. 3. The Assessee in IT(TP)A No.1350(B)/2011 was earlier known as M/s TYCO Electronics Corporation India Pvt.Ltd. It’s name was subsequently changed as TE Connectivity India Private Limited w.e.f 29.8.2012. The assessee in IT(TP)A No.1251(B)/2011 was earlier assessed as M/s TYCO Electronics Systems India Pvt.Ltd. This company got amalgamated with M/s TE Connectivity India Pvt.Ltd., pursuant to a scheme of amalgamation approved by the Hon’ble Karnataka High Court on 11.9.2014. Thus both the appeals relate to the same Assessee but the assessment of the Assessee in IT(TP) A.No1251/B/2011 is in relation to assessment of income of TYCO Elecctronics Systems India Pvt.Ltd., as successor and in respect of the income earned by the predecessor.
IT(TP)A No.1350(B)/2011(Assessment year 2007-08)
As far as this appeal is concerned the grounds 1 to 6 raised by the assessee reads as follows: “The grounds mentioned herein are without prejudice to one another.
That the order of the learned Assistant Commissioner of Income-tax, Large Tax Payer Unit, Bangalore (Assessing Officer' or 'AO') to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal. 3.That the learned AO and the learned Dispute Resolution Panel (Panel') erred in upholding the rejection of Transfer Pricing (TP) documentation by the learned Additional Commissioner of Income tax (Transfer Pricing) —II, Bangalore (Transfer Pricing Officer' or 'TP0'). 4. That the learned AO and the learned Panel erred both in facts and law in confirming the action of the learned TPO of making an overall adjustment to the transfer price of the Appellant by Rs. 499,751,416 in respect of its various divisions, holding that the international transactions do not satisfy the arm's length principal envisaged under the Indian Income Tax Act, 1961 (the Act') and in doing so grossly erred in: 4.1.Upholding the rejection of comparability analysis of the Appellant in the TP documentation and in submissions provided during the assessment
IT(TP)A No.1350 & 1251(B)/201 3 proceedings, and confirming the comparability analysis as adopted by the learned TPO in the TP Order. 4.2.Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2006-07) data for comparable companies should be used. 5. That the learned AO / the learned DRP erred in upholding the adjustment of INR 258,394,768 in the license manufacturing segment of the Appellant made by the learned TPO and in doing so grossly erred in: 5.1. Upholding the TP adjustment even for the non Associated Enterprise (`AE') transactions of the Appellant; 5.2. Not considering the alternate economic analysis provided by the Appellant during the assessment proceedings, wherein the cash profit margin was considered as the appropriate Profit Level Indicator; 5.3.Disregarding the fact that the profitability of the Appellant in relation to transactions with AEs is far greater as compared to the profitability with regard to sales made to non-AEs transactions. 6.That the learned AO / the learned DRP erred in upholding the adjustment of Rs 25,002,014 in the contract manufacturing segment of the Appellant made by the Learned. TPO and in doing so grossly erred in: 6.1.Disregarding the adjustment towards under utilisation of capacity suffered by the Appellant during the year; 6.2 Rejecting the alternate economic analysis provided by the appellant during the aassessment proceedings, wherein the cash profit margin was considered as the appropriate profit level indicator.”
The assessee has filed an application for admission of the following additional grounds of appeal which are connected to ground no.1 to 6 referred to above. In the additional ground raised by the assessee in its application dated 26-06-2019 the assessee seeks to raise the following additional grounds no.15-18. “The grounds mentioned herein are without prejudice to one another. 15. That the learned AO/ learned TPO erred in considering the following companies in the comparability analysis for the Licensed Manufacturing Segment which do not satisfy the test of comparability. a) APW President Systems Limited b) Raychem RPG Limited c) Easun Rerolle Limited d) Control & Switch Gears Contractors Limited e) Hind Rectifiers Limited 16. That the learned AO/ learned TPO erred in rejecting companies similar to the Appellant while performing the comparability analysis for the Licensed Manufacturing Segment. a) Cosmo Ferrites Limited
IT(TP)A No.1350 & 1251(B)/201 4 b) Easun Reyrolle Limited c) Fine-Line Circuits Limited d) Hind Rectifiers Limited e) Incap Limited f) Kaycee Industries Limited g) Naina Semiconductors Limited h) Reed Relays & Electronics India Limited i) Ruttonsha International Rectifier Limited j) S P E L Semiconductor Limited k) Samtel Color Limited l) Samtel India Limited m) Asian Electronics Limited n) Salora International Limited o) Universal Cables Limited p) K.Dhandapani & Co 17. That the learned AO/ learned TPO erred in considering companies in the comparability analysis for Contract Manufacturing Segment which do not satisfy the test of comparability. a) D-M-E Company India Private Limited b) Iykot Hitech Toolroom Limited c) Ucal Machine Tools Limited 18. That the learned AO/ learned TPO erred in rejecting companies similar to the Appellant while performing the comparability analysis for Contract Manufacturing Segment. a) Akar Tools Limited b) Electronica Machine Tools Limited c) Lakshmi Precision Tools Limited
In another application dated 26.6.2019, the Asssessee has sought to raise the following additional grounds which is also related to determination of ALP. “The learned TPO and the learned DRP failed to appreciate the difference in rates of depreciation adopted by the Appellant and the comparable companies as selected by the Company in the Transfer Pricing Study and the learned TPO in the TP Order which would warrant an adjustment to account for the same.”
Ground no.1 to 6 and the additional grounds are all related to determination of ALP in respect of an international transaction entered into by the assessee with its AE in the Licensed Manufacturing Segment and the Contract Manufacturing Segment.
BUSINESS PROFILE OF THE ASSESSEE: 8. The Assessee for the year under consideration was a 100% subsidiary of Tyco Electronics Corporation, US, which is a part of the Tyco Group. The Assessee was a
IT(TP)A No.1350 & 1251(B)/201 5 licensed manufacturer of connectors and cable interconnects which are used in the various industrial segments namely Automotive, Computer and Consumer Electronics ('CC&CE'), Appliances and General Industrial and Commercial (`GIC'). The Assessee sells these products in India and also exports them to Tyco Group companies worldwide. The Assessee had another facility for the manufacture of fibre optic cable interconnects, which were sold to Tyco Group. The Assessee also trades in AMP Netconnect cables and switches, which are used for providing IT networking solutions at commercial premises. The Assessee buys connectors from Tyco Group and sells them to customers in India. The Assessee also provides pre-sales support to Tyco Group companies, for which it receives sales commission. Additionally, the Assessee undertakes certain services which are auxiliary and ancillary to the main operations. Such business auxiliary services include: engineering design services with respect to CAD (Computer Aided Design) and Non- CAD; sourcing of certain raw materials and components from the Asia Pacific region for Tyco Group and back-office accounting services to Tyco Group. Vide the order of the Hon'ble High Court of Karnataka dated June 12, 2008, Tyco Electronics Tools (India) Private Limited (`TETIL') and Automotive Wiring Systems Private Limited (`AWSPL'), were amalgamated with TECIL effective April 01, 2006. With regard to AWSPL, the business was discontinued w.e.f. May 31, 2004 and accordingly, during the year, had no operations.However, pursuant to the merger of TETIL with TECIL, during the year under consideration TECIL was also engaged in the manufacturing of tools (dies and moulds), which are used in the manufacture of electrical and electronic interconnect devices and designing of tools, which was earlier carried out by erstwhile TETIL. INTERNATIONAL TRANSACTION:
During the Financial Year (`FY') 2007-08, the following were the international transactions entered into by the Assessee: -. Particulars Amount(INR) 1,616,337,583 Purchase of raw materials Sale of manufactured goods 2,349,614,645
IT(TP)A No.1350 & 1251(B)/201 6
Payment of Royalty 32,428,012 Sale of traded goods 10,033,119 71,828,733 Purchase of capital goods
Particulars Amount(INR) Receipt of agency Commission 100,236,765 Income from provision of services 36,871,811 Payment of Information System Charges (IS Charges) 173,771,0o1 Reimbursement of expenses paid 17,119,782 Unsecured loan 136,09,156 Total Value of international transactions 4,421,850,607
During the assessment proceedings for the year under consideration, the Assessing Officer (AO), based on the order of the Transfer Pricing Officer (TPO) proposed the following additions to the Assessee's returned income vide the draft assessment order dated December 30, 2010.
Particulars Amount(INR) Licensed manufacturing segment (Including adjustment 416,545,734 of INR 178,150,966/- on account of IS charges) Contract manufacturing segment 25,002,014 Interest payment on ECB 6,927,688 Interest on outstanding debts from Associated 51,276,000 Enterprises (`AEs')
Total transfer pricing adjustments 499,751,416
Aggrieved by the aforementioned proposed additions to its income, the Assessee filed its objection before the Dispute Resolution Panel (DRP'). The DRP vide directions dated September 22, 2011 upheld the aforementioned adjustments. The AO, based on the directions of the DRP, completed the assessment and issued the Final Assessment Order on October 24, 2011.
Aggrieved by the addition to the income made in the final assessment order, the Appellant is in appeal before the Tribunal. As far as the addition made to the total income pursuant to determination of ALP in the Licensed Manufacturing Segment is
IT(TP)A No.1350 & 1251(B)/201 7 concerned, the facts are that the Assessee as a licensed manufacturer, is engaged in the manufacture of connectors and cable interconnects, under license from Tyco Group used in various industrial segments. The manufactured products are exported to the Toyo Group and the question is as to whether the price received by the Assessee for such export was at Arm’s Length. The Assessee during the relevant previous year had three manufacturing facilities, two at Bangalore and one at Pune. The Bangalore facility in manufacturing connectors and cable interconnects for the automotive, Computer and Consumer Electronics (`CC' &`CE') and General Industrial and Commercial (`GIC') industrial segments in India and also exports to Tyco Group. It is also engaged in the manufacture of Fibre Optics cable interconnects which is entirely exported to the Tyco Group. The manufacturing facility at Pune caters to the wiring harness requirements of the automotive and appliances industry. The manufacturing know-how employed by the Assessee has been licensed to it by the Tyco Group and receives comprehensive technical support in matters relating to construction and installation activities of the manufacturing facilities, assistance in developing quality parameters, evaluation of different manufacturing methods, the selection of the most appropriate one etc.
The Ld. TPO rejected the TP documentation maintained by the Appellant and undertook a fresh comparability analysis to evaluate the arm's length nature of the international transactions pertaining to the licensed manufacturing segment. The TPO selected 5 companies as comparable to that of the Appellant with an arithmetical mean mark-up of 14.12% on Arles as the ALP. Based on the above, the Ld. TPO determined an adjustment of INR 416,545,734/-
As far as the contract manufacturing segment is concerned the facts on the determination of ALP are that the Assessee as a contract manufacturer, is engaged in the manufacture of tools (dies and moulds). Based on orders placed by Group companies, the Assessee undertook contract manufacture activity. It was the plea of the Assessee that during the year, it was not able to fully utilize its installed capacity, for want of additional projects (only 75% of the total capacity was utilized). Accordingly, for determining the arm's length nature of the international transactions relating to the contract manufacturing segment, a capacity adjustment was made to
IT(TP)A No.1350 & 1251(B)/201 8 the segment financials to account for the unabsorbed fixed costs relating to depreciation of plant & machinery, repair & maintenance for plant & machinery and certain fixed wages. Post adjustment of INR 24,654,515 for unutilized capacity, the Assessee had earned an effective mark-up on total cost of 12% in respect of its contract manufacturing segment. The Assessee in its Transfer Pricing Study (`TP Study') selected 3 companies as comparable whose mean mark-up on total cost was determined at 11%. The results of the benchmarking analysis showed that the Assessee would be required to earn a margin of mark-up on cost of 11% to confirm that the international transaction relating to the contract manufacturing segment comply with the arm's length standard. Given that the effective mark-up on cost of 12% earned by the Assessee was higher than the mean mark-up of comparable companies, the same was concluded to be at arm's length.
The TPO in the proceedings before him rejected the comparable companies selected by the Assessee on the basis that they were functionally dissimilar and proceeded to introduce a new set of comparable companies arriving at an arm's length margin of 10.59%. Further, the TPO having computed the capacity utilization of the comparable companies selected by him, erroneously held that the same do not have a higher utilization than the Appellant. Based on this, the Ld. TPO concluded that the claim for underutilized capacity as undertaken by the Appellant in the TP Study was not warranted and determined the operating mark-up on cost of the Assessee at - 5.16% resulting in an adjustment of INR 25,002,014. The DRP confirmed the approach of the learned TPO. This resulted in the addition of INR 25,002,014 with respect to contract manufacturing segment.
Aggrieved by the determination of ALP in the license manufacturing segment as well as contract manufacturing segment the assessee is in appeal before the Tribunal raising grounds 1 to 6 and the additional grounds referred to above in the earlier paragraphs of this order.
IT(TP)A No.1350 & 1251(B)/201 9 17. We have heard the rival submissions. Against the determination of ALP in the aforesaid two segments by the TPO which was incorporated by the AO in the draft order of assessment, the assessee filed objections before the DRP. The objections before the DRP raise several issues of TP on determination of ALP. There were 7 different objections raised by the assessee and detailed exhibits were filed in support of objections. To give an illustration of the nature of objections and the manner in which the DRP dealt with such objections, We will take up for consideration the objection of the assessee with regard to choosing of comparables in the license manufacturing segment being objection no.5, 6 & 7 raised by the assessee before the Hon’ble DRP. The objection in this regard is as follows; “5. The learned AO/learned TPO erred in the arbitrary adoption and imposition of filters for the determination of comparables in respect of both the license and contract manufacturing segments namely: Adoption of filters by the learned TPO a. Companies having manufacturing sales less than 75% of the total sales were rejected with respect to both the license manufacturing and contract manufacturing segments; b. Rejection of companies having sales turnover of less than 1/4th and more than 4 times of the assessee’s sales: c. Companies with related party transaction of more than 25% were rejected, instead of 10% considered by the assessee; and d. Rejection of comparables based on erroneous assertion of not a comparable product”. 6. The learned AO/learned TPO has erred in arbitrarily including companies which were not functionally comparable to the assessee and excluded others were potentially comparable. Consequently, the learned TPO operated with a pre-determined mind-set of arriving at the margin which would result in an adjustment to the transfer prices of the assessee. 7. That the Learned AO/Learned TPO in arriving at the djustment for the licensed manufacturing function, erred in making an adjustment to even the transaction with third parties and in not appreciating that the profitability of the Assessee in relation to the sales made to AEs is far
IT(TP)A No.1350 & 1251(B)/201 10 greater as compared to the profitability with regard to sales made to non AE’s with respect to the licensed manufacturing segment.
On the above ground elaborate submissions were made by the assessee in the objection in Form no.35, Appendix ’A’ at page 22-43 of the objections before the DRP. In particular on the adjustment having been made on non-AE transactions also in the contract manufacturing segment, the Assessee has brought to the DRP’s notice the details of non-AE transactions at page-40 to43 of objections in form No.35A filed before the DRP. The DRP however, dealt with this aspect as follows; “The Eligible Assessee objects to the adoption and imposition of filter for the determination of comparables in respect of both the license and contract manufacturing segments; The Eligible Assessee contends that while determining the filters manufacturing sales less than 75% of the total sales should be excluded and rejection of comparables should not be based on erroneous assertion of "not a comparable product". The objections of the Eligible Assessee in this context have been sufficiently met through detailed and comprehensive deliberations by the Transfer Pricing Officer in the Transfer Pricing Order. After having fully considered all the arguments of the Eligible Assessee the Transfer Pricing Officer has justified the position taken in the given context to determine the Arm's Length Price in the instant case. In the interest of economy of words the deliberation on this issue in the Transfer Pricing Order is not replicated here. There is no reason however to disagree with the position taken by the Transfer Pricing Officer in this regard. Nevertheless in the absence of any fresh arguments or analysis of the Eligible Assessee before the Dispute Resolution Panel any interference in the position taken by the Transfer Pricing Officer is not necessary and justified. The Eligible Assessee objects to the adjustment for the license manufacturing function, erred in making an adjustment to even the transactions with third parties and in not appreciating that the profitability of the Assessee in relation to the sales made to the Associated Enterprises is far greater as compared to the profitability with regard to sales made to non Associated Enterprises with respect to the license manufacturing segment;
IT(TP)A No.1350 & 1251(B)/201 11 The objections of the Eligible Assessee in this context have been sufficiently met through detailed and comprehensive deliberations by the Transfer Pricing Officer in the Transfer Pricing Order. After having fully considered all the arguments of the Eligible Assessee the Transfer Pricing Officer has justified the position taken in the given context to determine the Arm's Length Price in the instant case. In the interest of economy of words the deliberation on this issue in the Transfer Pricing Order is not replicated here. There is no reason however to• disagree with the position taken by the Transfer Pricing Officer in this regard. Nevertheless in the absence of any fresh arguments or analysis of the Eligible Assessee before the Dispute Resolution Panel any Interference in the position taken by the Transfer Pricing Officer is not necessary and justified.
It is thus clear that the DRP has not passed a speaking order and on the grounds with regard to the issue of determination of ALP in the contract manufacturing segment and the license manufacturing segment. On this short ground the said order which was incorporated in the final order of assessment, needs to be set aside to the DRP for fresh consideration. We are of the view that he additional grounds raised by the assessee before the Tribunal can also be considered by the DRP and the DRP shall pass a speaking order after affording opportunity of being heard to both the parties.
The next issue to be considered is with regard to ground no.7 which is in respect of determination of ALP in respect of payments made by the assessee to its AE for providing information services to the assessee. Ground no.7 reads as follows; “7. That the learned AO and the learned Panel erred both in facts and law in arbitrarily disallowing an amount of Rs.158,150,966/- paid towards Information Services (IS) charges by the appellant and in doing so grossly erred in: 7.1 Upholding the application of Comparable Uncontrolled Price(CUP) Method as the most appropriate method as against the application of aggregated Transactional Net Margin (TNMM) by the appellant in the TP documentation.
IT(TP)A No.1350 & 1251(B)/201 12 7.2 Upholding the conclusion of the learned TPO that no commercial or economic benefits have been received by the appellant on payment of IS charges to the associated enterprises. 7.3. Upholding the approach of the learned TPO of questioning the necessity of making payments of IS charges to the associated enterprise without appreciating the business exigencies behind such payment. 7.4 Upholding the arbitrary conclusion of the learned TPO that the arm’ length price of payments of IS charges is R.20,000,000, therein completely ignored the evidences provided by the appellant in respect of services/benefit received against such payment. 21. As far as ground no.7 raised by the Assessee is concerned, according to the Assessee the Tyco Group of which the Assessee is a part, had invested a significant portion in developing an IT infrastructure that can be used by all Tyco Group companies including the Assessee. Tyco Group charges the group companies for accessing the IT infrastructure based on the actual costs incurred on the IT infrastructure. The actual cost is pro-rated to the group companies based on their usage of the IT infrastructure and such costs are referred to Information System Charges paid by the Assessee to its AE. During the FY 2006-07, the Assessee had paid Information System (IS) Charges amounting to INR 178,150,966 to its AE, Tyco Electronics Corporation USA, the ultimate parent company of the taxpayer for IT infrastructure and other support services. Since Assessee does not make any IS Charges payments to any third party, there are no internal CUPs to benchmark this particular transaction. Further there were no external CUPs to benchmark the transactions of the Assessee with respect to the payments made by the Assessee to its group companies. Since, the transaction of IS Charges is closely linked to the business of the Assessee, IS Charges were aggregated under TNMM for each segment and thus under TNMM the transactions were treated as at arm's length 22. The TPO classified the payment of IS Charges as a class of its own and proposed to analyse the transaction under CUP method. The TPO contested the aggregation of the payment of IS Charges with other business segments and stated that each transaction has to be examined having regard to the arm's length principle by applying the most appropriate method. The TPO relied on the decision of Hon'ble
IT(TP)A No.1350 & 1251(B)/201 13 Mumbai ITAT in the case of UCB India Pvt Ltd (317 ITR 292 (AT) wherein a similar issue was discussed. Relying on the above, the TPO held that only similar transactions, i.e, all the transactions of the enterprise are of the same type, same class and of similar variety, in such a situation, the operating margins of the enterprise would be the TNMM of a class of transactions. Based on the above, the TPO concluded that the payment of IS Charges is a separate class of transaction and the same is to analyzed separately. The TPO called upon the Assessee to submit details and quantifications of such services. In compliance with the SCN, the Assessee submitted the requisite information vide letter dated October 31, 2011 consisting of: The details and nature of these intra group services rendered by the AEs;
The basis of allocation of costs and the cost allocation keys depicting the nature of costs. The fact that other group companies also make payment on account of IS charges; A copy of the duly signed agreement for support functions; The fact that TECIL benefits from these IT Infrastructure and support services and accordingly compensates Tyco Group on a cost basis. The benefits that have accrued to TECIL on account of receipt of such services; The business rationale behind centralizing the IT Services and the function of the AE of TECIL which facilitates the provision of such ERP package as otherwise the affiliates would need to pay third party for these services or willing to have these services performed in-house. Again an uncontrolled enterprise similar to Tyco Group would charge a relatively higher price for the provision of such intra-group services. The details of heads under which the IS charges are shown in the audited financials - that the IS charges of INR 84,674,938 are accounted under Schedule 15 ("Administrative and Other expenses") under "Repairs and Maintenance" subheading "Others". 23. The TPO concluded that the Assessee did not prove substantially that the services were rendered and further held that the Assessee did not provide quantification of such services in terms of actual expenditure incurred and commensurate benefits derived therefrom. Thereby, the TPO held that the said
IT(TP)A No.1350 & 1251(B)/201 14 services even if assumed to be received by the Assessee, an ad-hoc amount of INR 2,00,00,000 is the arm's length price of implementation of SAP resulting in an adjustment of INR 84,674,938.
Aggrieved by the order of AO in which the directions of the DRP were incorporated, the assessee has preferred the present appeal before the Tribunal. On the issue of information services, the assessee has filed an application before the Tribunal for admission of additional evidence in its application under Rule 29 of ITAT Rules, 1963. It is the plea of the Assessee for admission of additional evidence that under Rule 29 of the Income-Tax (Appellate Tribunal) Rules, 1963 (`ITAT Rules') leave of the Tribunal to file additional evidences is sought to emphasis its contentions regarding services received by the Assessee the justification for the payment made for such services. The additional evidence that the Assessee wishes to submit before the Tribunal is a report which encapsulates adequate and comprehensive responses to the aforementioned queries of the learned TPO. The Report on Information Services received from Tyco Electronics Corporation, US (`TEC') by the Assessee which encapsulates an overview of the overall organizational structure of TEC which is in place to render such services, the various services rendered by TEC, the analysis of various cost centres and the determination of the service fee, including the basis of allocation of this charge to the Appellant against which such payments have been made. It is the plea of the Assessee that the additional evidence would have a material bearing and impact on the outcome of the appeal and that due cognizance ought to be given to the same whilst adjudicating on the arm's length nature of the international transaction.
We have perused the request of the assessee for admission of additional ground and we find that the additional ground is in the form of a report on the nature of services received by the assessee. Hence, the same is admitted for adjudication as it is necessary for adjudication of the dispute before the Tribunal.
IT(TP)A No.1350 & 1251(B)/201 15 26. As far as ground no.7 is concerned, we find that despite elaborate submissions made before the DRP, the DRP has merely observed in page-16 of its order that the AO has dealt with the objections of the assessee. The order of the DRP is a non speaking order not dealing with specific contentions of the Assessee which are contained in page-44 to 54 of the Objections in form No.35-A filed before the DRP. We are of the view that the issue requires fresh examination by the DRP in the light of additional evidence filed before us. We direct the DRP to consider the issue afresh in the light of the additional evidence and also pass a speaking order on the objections of the assessee on the manner of determination ALP in respect of provisions of information services segment by the foreign AE to assessee.
Ground no. 8 & 9 raised by the assessee reads as follows; “8. That the learned AO and the learned Panel erred in upholding the adjustment of INR 6,927,668 in relation to interest paid on external commercial borrowing (ECB) loan. 9. without prejudice to ground no.8 the learned AO and the learned Panel erred in erroneously considering the adjustment towards interest paid on ECB as INR 6,927,668 as against INR 6,681,488 determined in the transfer Pricing Order”.
As far as the aforesaid grounds are concerned, the material facts are that the Assessee had availed of an External Commercial Borrowing (ECB) of USD 4.7 Million from Tyco Electronics Swiss Holdings GmbH, Switzerland during FY 2006- 07 with an average maturity period of more than five years. In this regard, the Assessee had paid interest at the rate of 6-months LIBOR plus 350 basis points as per the loan agreement on a quarterly basis. The Assessee had benchmarked the payment of interest on ECB as per Comparable Uncontrolled Price Method (`CUP') method considering the Prime Lending Rate (`PLR') as an external comparable available to benchmark the cost of an ECB loan viz. 13.28%. The equivalent rupee cost calculated by the Assessee is provided in para 5.11.3 of the TP Documentation on Page 50 of the TP documentation and claimed that the transaction was at Arm’s Length. wherein it can be seen this transaction is at ALP.
IT(TP)A No.1350 & 1251(B)/201 16
The TPO rejected the contentions of the Assessee and held that interest on ECB need to be benchmarked against currency specific LIBOR with spread varying from LIBOR plus 0.5% to LIBOR plus 2.75% for the ECBs and determined the ALP at LIBOR plus 1.38%. The average six months US LIBOR rate for FY 2006-07 being 5.40%, the CUP rate of ECBs was considered to be 6.78%. Accordingly, the TPO proceeded to make the adjustment of INR 6,681,488. The Hon'ble DRP upheld the decision of the TPO.
We have heard the submissions of rival parties and we find that even on this issue the DRP has passed a non-speaking order. At page-14, the DRP has merely observed that the TPO has sufficiently dealt with the issue and no interference is called to the order of TPO. In this regard, one of the objects of the assessee was that the adjudication had to be done on the contention that the adjustment ought to have been made on the daily outstanding loans and not on opening and closing balance as has been done by the TPO. We are of the view that this issue also requires fresh examination by the DRP as the order of the DRP is non-speaking order not dealing with the specific objections raised by the Assessee in pages-55 & 56 of the objections raised by the Assessee in Form No.35-A filed before the DRP. Accordingly, the order of DRP is set aside for fresh consideration by DRP to pass a speaking order after affording due opportunity of being heard to the assessee.
Ground no.9 raised by the assessee reads as follows; “9. without prejudice to ground no.8 the learned AO and the learned Panel erred in erroneously considering the adjustment towards interest paid on ECB as INR 6,927,668 as against INR 6,681,488 determined in the transfer Pricing Order”
As far as ground no.9 is concerned, the facts are that the Assessee had total receivable balance of INR 351,5712,000 from its AEs (including holding company and fellow subsidiaries) as on 31st march 2007 as per the financial statements for FY: 2006-07 on page 355 & 356 of the paper book. Out of this
IT(TP)A No.1350 & 1251(B)/201 17 amount, only INR 347,361,000 was outstanding from AEs. The appellant also had a total payable balance of INR 650,720,000 which is higher than the amount of receivables. The TPO deemed interest on perceived delays in collection of receivables from AEs on the average receivables balance from the AEs at the rate of 14% p.a. According to the TPO no interest has been charged on the delayed receipts from the AEs which would not have been available to unrelated parties. Therefore, deemed that a notional interest be charged on the receivable balances from the AEs. The TPO took 3 month USD LIBOR + 500 basis points and added 300 basis points for transaction cost and arrived at 13:3404% as the CUP rate. Keeping in mind that the AE does not offer any security, the TPO considered a rate of 14% p.a. The TPO calculated the amount of interest on the entire average receivable balance and made an addition of INR 51,276,000 to the appellant’s income. The DRP confirmed the order of the TPO.
Before us the ld.counsel for the assessee made several submissions. We find that the DRP has not addressed the objection of the assessee in a proper perspective. The specific ground before the DRP was that the transaction in allowing larger credit period was not an international transaction at all warranting determination of ALP. The submissions in this regard are contained in page-57 to 60 of the objections in Form No.35-A filed before the DRP. Despite elaborate submissions, the DRP in page-14 has merely observed that the TPO has sufficiently dealt with the objection of the assessee and there was no need for interference in the order of TPO. The order of DRP is a non-speaking order and is not even setting out of the arguments advanced by the assessee before it. We therefore, set aside the order of DRP and direct the DRP to pass a speaking order on this issue after affording an opportunity of being heard to the assessee.
Ground no.11 is with regard to the benefit on second proviso to sec.92C(2) of the Act. Ground no.12 is with regard to not granting credit of
IT(TP)A No.1350 & 1251(B)/201 18 advance tax paid. These grounds may also be considered by the DRP in the set aside proceedings. The other ground with regard to charging of interest are purely consequential.
In the result, appeal by the Assessee being IT(TP) A.No.1350/Bang/2011 is treated as allowed for statistical purpose.
As far as ITA No.1251(B)/2011 is concerned, the facts and circumstances of the case are identical. In fact the order of DRP is the same as was passed in IT(TP)A No.1350(B)/2011. The grounds of appeal raised by the assessee in this appeal reads as follows:
The grounds mentioned herein are without prejudice to one another. General Grounds
That the order of the learned Deputy Commissioner of Income-tax, Circle 12(4) Bangalore (Assessing Officer' or 'AO') to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal.
Transfer Pricing Related
That the learned AO and the learned Panel erred in upholding the approach of the learned Deputy Director of Income Tax (Transfer Pricing — V), Bangalore (Transfer Pricing Officer' or 'TP0') of rejecting the economic analysis of the Appellant in the Transfer Pricing (TP) documentation, prepared bonafide in compliance with the Transfer Pricing Provisions in the Income Tax Act, 1961 (the Act').. 4. That the learned AO and the learned Panel erred both in facts and law in upholding the adjustment of Rs. 41,615,026 with respect to the Power Systems segment of the Appellant as determined by the learned TPO holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 (the 'Act') and in doing so grossly erred in:
IT(TP)A No.1350 & 1251(B)/201 19 (a) Upholding application of Transactional Net Margin Method ("TNMM") as the most appropriate method based on his own assumptions and surmises as against Cost Plus Method (`CPM') with ratio of Gross Profit to Input Cost as the relevant Profit Level Indicator adopted by the Appellant in the TP Documentation. (b) Upholding the rejection of comparability analysis of the Appellant in the TP documentation/ provided in submissions during the assessment proceedings and confirming the comparability analysis as adopted by the learned TPO in the TP Order. (c) Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2006-07) data for comparable companies should be used. 5. That the learned AO and the learned Panel erred both in facts and law in arbitrarily disallowing the entire payment of Rs. 8,432,143, paid towards Information Service (`IS') charges by the Appellant, and in doing so grossly erred in: (a) Upholding the application of Comparable Uncontrolled Price ("CUP") Method as the most appropriate method as against the application of aggregated CPM by the Appellant in the TP Documentation. (b) Upholding the conclusion of the learned TPO that no commercial or economic benefits have been received by the Appellant on payment of IS charges to the Associated Enterprise. (c) Upholding the approach of the learned TPO of questioning the necessity of making payment of IS charges to the Associated Enterprise without appreciating the business exigencies behind such payment. (d) Upholding the conclusion of the learned TPO that the arm's length price of payment of IS charges as NIL, therein completely ignored the submissions made by the Appellant in respect of services/benefit received against such payment. 6. The learned AO and the learned Panel erred in not proving the benefit of lower range of +/-5% in determination of arm's length price.
Other than Transfer Pricing Related
That the Learned Assessing Officer erred in treating the provision for warranty as an unascertained liability, and making an addition of Rs 1,120,000 to total income. 8. (a) That the learned Assessing Officer erred in stating that the Company was not in possession of Interest Free Funds which could be used to purchase fixed assets.
IT(TP)A No.1350 & 1251(B)/201 20 That the learned Assessing Officer erred in stating that the share (b) application money received by the Company would have been utilized for working capital purposes. That the learned Assessing Officer erred in proposing to capitalize (c) interest of Rs 4,536,726 expenses on a arbitrary manner on the ground that the interest expense incurred towards the addition to fixed assets has not been factored. Without prejudice to the above, the learned Assessing Officer erred in (d) not allowing depreciation on the capitalized interest expense. 9. That the learned Assessing Officer erred in disallowing the professional charges towards structural consultancy amounting to Rs 650,180 holding it to be capital in nature. 1o. That the learned Assessing Officer erred in disallowing expenses accrued towards repairs and maintenance of Rs 101,200, product testing fees of Rs 200,000 and foreign travel expenses of Rs453,359 on the ground that they are unknown liabilities recognized on a provisional basis. 11. (a) That the learned Assessing Officer erred in stating that the Company has set off foreign exchange loss forming part of the Current Liabilities schedule in arriving at the net foreign exchange gain for the previous year 2006-07 relevant to the assessment year 2007-08. (b) That the learned Assessing Officer erred in stating that the foreign exchange loss of Rs 2,408,670 proposed to be disallowed has been recognised on restatement of liabilities that relate to the purchase of capital goods and is therefore capital in nature. (c) Without prejudice to the above, the learned Assessing Officer erred in not considering the fact that the gain recognised on the year end restatement of assets and liabilities have been offered to tax. (d) That the learned Assessing Officer erred in stating that the foreign exchange losses are notional in nature and are an unascertained liability. (e) Without prejudice to the above, the learned Assessing Officer erred in not allowing depreciation on the capitalized foreign exchange loss. 12. That the learned AO erred in granting credit for tax deducted at source (TDS) amounting to only Rs.923,899 instead of Rs.10,866,792 as claimed in the return of income. 13. That the learned AO erred in stating that a refund of Rs. 1,034,770 has been issued under section 143(1) of the Act to the company.
The assessee has filed an application dated 27-06-2019 for admission of the following additional ground;
IT(TP)A No.1350 & 1251(B)/201 21 “The ld.TPO and the ld.DRP failed to appreciate the difference in rates of depreciation adopted by the appellant and the comparable companies as selected by the company in the Transfer Pricing Study and the ld.TPO in the TP order which would warrant an adjustment to account for the same. That the appellant craves to leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with law.”
As far as this appeal is concerned, the facts are that the Assessee was formerly known as Dulmison WS Power Systems Limited, which was engaged in the manufacture of Space and Vibration Dampers and other equipment used in power transmission. As a result of the worldwide acquisition of Dulmison by Tyco Group in 2000, Dulmison WS Power Systems Limited was renamed Tyco Electronics Systems India Private Limited. The Assessee is a wholly owned subsidiary of Tyco Asia Investments Ltd., Mauritius, which is ultimately held by Tyco International Limited, Bermuda (hereinafter collectively referred as 'Tyco Group'). The Assessee has two lines of businesses, namely Power Systems and Energy. The international transactions entered into by the Assessee during the financial year ('FY') 200607 corresponding to AY 2007-08 are as follows:
Particulars Amount (INR) Purchase of raw material 278,506,805 Sale of manufactured goods 3,083,473 Payment of Information Service ('IS') charges 8,432,143 290,022,421 Total 39. During the assessment proceedings for the year under consideration, the AO based on the order of the TPO made the following additions to the Assessee's returned income.
IT(TP)A No.1350 & 1251(B)/201 22
Particulars Amount (INR) Adjustment on account of difference in cost paid for 40,892,405 raw materials • Adjustment on account of difference in sale price 722,621 8,432,143 Adjustment on account of IS Charges 50,047,169 Total additions
Aggrieved by the aforementioned additions to its income, the Appellant filed its objection before the DRP. The DRP upheld the order of the TPO on all the aforementioned adjustments. Aggrieved by the same, the Assessee has filed appeal before this Tribunal. 41. As far as the addition made on account of international transaction of supply of raw materials by the AE to the Assessee in the Power Systems Business and sale of finished goods to AE, is concerned, the facts are that the Power Systems business is engaged in the manufacturing of Power Systems used in the telecommunication industry. For its manufacturing in India, the Assessee purchases Rectifiers and Connectors (which are the key components in the Power Systems manufactured) from associated enterprises (AEs). A miniscule portion of the Power Systems being manufactured is sold to AEs (INR 0.28 crores). In the TP Documentation, the Assessee considered the Cost Plus Method (CPM) as the most appropriate method for benchmarking the transactions under the power system and the energy segments for arm's length. Further, mark-up on Gross Profit (i.e. Gross Profit / Input Cost) was considered as the relevant profit level indicator (`PLI').(Page 33 of the TP Study on Page 412 of the paperbook) Further, during the course of the assessment proceedings, the Assessee had also carried out a profitability comparison at the gross profit level in respect of transactions with Associated Enterprises (AEs) and third party customers (Page 12 of the DRP directions on Page 41 of the paper book). This comparison of the internal profitability between the AE sales and non-AE sales at the gross profit level was used to establish the arm's length results. Also, during the course of the assessment proceedings, the TPO had requested the Assessee that
IT(TP)A Nos.1350 & 1251B)/2011. 23 for application of the CPM, certain “above the line expenses” had to be included in Input Costs in addition to the ones considered by the Assessee. The Assessee undertook the said exercise of including certain other expenses in Input Costs (as required by the TPO, namely, energy costs, depreciation, wages and repair & maintenance) and computed the Gross Profit / Input Cost ratio of the comparables vis-à-vis' the Assessee's Gross Profit / Input Cost ratio. For uncontrolled comparable companies, undertaking manufacturing of power systems, the mean Gross Profit / Input Costs ratio was determined at 13%. The Gross Profit / Input Costs ratio of the Appellant's power systems segment was 27%. Accordingly, the international transactions of the Assessee in relation to purchase and sale vis-à-vis' the Power Systems segment were claimed to be at arm's length.
The TPO during the assessment proceedings concluded that TNMM is the most appropriate method as against CPM adopted by the Assessee. The TPO arrived at this conclusion based on the reasoning that the Assessee had not given details of what are the expenses that are considered direct and indirect in the case of comparables, the basis thereof and also what are the expenses that are excluded thereof. According to the TPO for the purpose of computing gross margins, accurate data is required in respect of direct, indirect costs and other costs in respect of all the comparables chosen. In this regard it was the plea of the Assessee that vide letter filed on October 25. 2010, it was explicitly submitted to the TPO that the Input Costs, considered for determining the gross profit, included raw material purchases, change in stocks and payment of IT charges with regard to TESIL. The same PLI was selected for the comparable companies whilst determining the arm's length price. However, any other expense apart from raw material purchases and change in stock were excluded from the computation. This would also be evident from the excerpts of the submission reproduced by the TPO on Page 14 of the TP Order available on Page 131 of the Paper book. Based on the above, it is clear that the TPO has not duly considered the submissions of the Assessee. The second reasoning of the TPO was
IT(TP)A Nos.1350 & 1251B)/2011. 24 that CPM presents some practical difficulties in ident ifying the costs incurred for the manufacture of goods like whether an indirect cost is towards manufacturing or is it an enterprise level expense." (Page 12 of the TP Order on Page 129 of the paper book). It is the plea of the Assessee that reasoning of the TPO in this regard is merely academic in nature besides being contradictory to his own view whilst requesting the Assessee to undertake a re-computation of the gross profit margin including certain above the line items. The DRP confirmed the order of the TPO.
As far as the transaction of payment for services for providing Information system is concerned, the facts are identical to the appeal in IT(TPA.No.1350/Bang/2011 which we have decided in the earlier part of this order.
The assessee has filed application dated 26-08-2019 for admission of additional evidence under Rule 29 of the ITAT Rules, 1963 and the nature of this additional evidence which is in the form of a report of the IS services received by the Assessee and the reasonableness of payment made for such services.
Aggrieved by the aforesaid additions the Assessee has raised grounds No.1 to 6 before the Tribunal. After hearing the rival submissions, we find that despite elaborate submissions made by the Assessee before the DRP, the DRP in its order dealt with the objection of the assessee by observing as under; “The eligible assessee objects to the selection of transactional Net Margin Method as the most appropriate method instead of Comparable Uncontrolled Price Method as selected by it in it Transfer Pricing Report. The objections of the eligible assessee in this context have been sufficiently met through a detailed and comprehensive deliberations by the Transfer Pricing Officer vide para No.-4 on page-9 to 18 of the Transfer Pricing Order. After having fully considered all the arguments of the eligible assessee the Transfer Pricing Officer has justified as to how not the comparable Uncontrolled Price Method but the Transactional Net Margin Method is the most appropriate Method to determine the Arm’s Length Price in the instant case. In the interest of economy of words the deliberation on this issue in the Transfer Pricing Officer is not replicated here. There is no reason however, to disagree with the position taken by the Transfer Pricing Officer in this regard.
IT(TP)A Nos.1350 & 1251B)/2011. 25 Nevertheless in the absence of any fresh arguments or analysis of the eligible assessee before the Dispute Resolution Panel any interference in the position taken by the Transfer Pricing Officer is not-necessary and justified”.
The ground raised by the assessee before the DRP is that cost plus method (CPM) should be adopted as most appropriate method, whereas the DRP has proceeded as if the Assessee wanted to adopt the comparable uncontrolled price (CUP) method. It is thus clear that the order of DRP is a non-speaking order and should be set aside. As far as the addition made on account of determination of ALP for providing information system services the assessee has filed an application to leave to file additional evidence. We have already referred to similar request in the appeal of the assessee in IT(TP)A No.1350(B)/20111 and for the reasons stated therein, admitting the request of the assessee for filing additional evidence. The additional evidence is of the same nature as was sought to be filed in IT(TP)A No.1350(B)/2011. Even on the issue of determination of ALP for provision of information system services the order of DRP is a non-speaking order and therefore, the same is set aside to be considered and decided afresh by the DRP in the light of the additional evidence filed before the Tribunal and after affording an opportunity of being heard to the assessee.
As far as ground no.7 to 11 raised by the assessee are concerned the position is the same in as much as the DRP has passed a non-speaking order without considering the specific arguments of the assessee and therefore, the same is liable to be set aside. The DRP is directed to pass a speaking order on the issue after affording an opportunity of being heard to the assessee.
Ground no.12 & 13 raised by the assessee are also matters which require verification and the DRP may pass an order after verifying correct facts in this regard.
In the result, the appeal being IT(TP)A No.1251(B0/2011 is also treated as allowed for statistical purposes.
IT(TP)A Nos.1350 & 1251B)/2011. 26 50. In the result, both the appeals of the assessee are treated as allowed for statistical purposes.
Order pronounced in the open court on 19th February, 2020.
Sd/- Sd/- (A.K.GARODIA) (N.V.VASUDEVAN) ACCOUNTANT MEMBER VICE P[RESIDENT Dated: 19-02-2020. *am Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5. DR 6.Guard File
By Order
Asst.Registrar