INVTEVA PRODUCTS INDIA AUTOMOTIVE PRIVATE LIMITED ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-3(1)(1), BANGALORE

Rejection of economic analysis undertaken by the Appellant

Inappropriate use of single year margins of the comparable companies for transfer pricing analysis

Use of non-contemporaneous financial data of comparable companies for transfer pricing analysis

Abnormal expenditure considered as operating in nature Erred in considering certain abnormal expenses like excessive sorting charges and warranty charges, as part of the operating expenses for computation of margins of the Appellant;.

Inappropriately considering additional companies as comparable to the Appellant in relation to manufacturing segment

Rejection of internal TNMM analysis done for Inteva manufacturing segment

Incorrect computation of depreciation adjustment post Hon'ble DRP's directions

Non- grant of working capital adjustment

TP adjustment should be restricted to international transactions with associated enterprises

Transfer pricing adjustment without giving benefit of +/- 5 percent as available under proviso to section 92C(2) of the Act

Modification/ application of additional filter while selecting comparable companies Erred in modifying and adding certain inappropriate new filters for rejection of comparable companies; 16. Accepting certain additional companies as comparable to the Appellant in relation to provision of design engineering services segment Erred in accepting certain additional companies as comparable based on unreasonable comparability criteria;

Erred in rejecting following companies identified by the Appellant in its transfer pricing study report on the basis of non-availability of the data in public domain: • Cigniti Technologies Limited • Caliber Point Business Solutions Ltd. • Evoke Technologies Private Limited • Helios & Matheson Information Technology Ltd. • Ybrant Digital Ltd. • Maveric Software Limited • Thirdware Solutions Ltd.

Non- grant of working capital adjustment

Risk Adjustment Erred in not granting suitable adjustments for differences in function, asset and risk profile of the Appellant vis-à-vis the comparable;

Transfer pricing adjustment without giving benefit of +/- 5 percent as available under proviso to section 92C(2) of the Act

Levy of interest under section 234B of the Act Erred in charging of interest under section 234B of the Act;

Initiation of penalty proceedings under section 274 read with section 271(1)(c) of the Act

Learned AR of the assessee submitted a Ground wise summary and he submitted that in this summary, it is stated by him that some grounds being Ground Nos. 1 to 3, 15 are general and some grounds being Ground Nos. 4,5, 8 to 10 and 17 to 23 are not pressed. He submitted that as per the same Ground wise summary, Ground No. 29 about interest u/s 234B is consequential and Ground No. 30 about initiation of penalty proceedings u/s 271 (1) ( c) is premature. Accordingly, these grounds are rejected. We have to decide ground Nos. 6,7,11 to 14, 16, 24 to 28 and additional Grounds 31 & 32. He also submitted that in last column of the same Ground wise summary, the arguments of the assessee are noted and these grounds can be decided by considering the same and after hearing the learned DR of the revenue. We therefore, note the said submissions of the learned AR of the assessee and also note the arguments advanced by the learned DR of the revenue for each of the grounds pressed before us and decide these grounds. 4. Regarding Ground No. 6, it is submitted by the learned AR of the assessee in last column of the same Ground wise summary that the TPO has removed miscellaneous income from operating income and considered Donation as operating expenses without giving any opportunity to the assessee. It is also a submission that this matter can be remanded back to AO/TPO to decide afresh after giving opportunity to the assessee. Learned DR of the revenue supported the orders of the authorities below.

We have considered the rival submissions. We find that on pages 42 to 47 of the Appeal Memo is the copy of order dated 29.11.2016 passed by TPO u/s 154 and on pages 14 to 19 of the Appeal Memo is the order dated 09.02.2017 passed by the TPO as order giving effect to DRP order. In the order dated 29.11.2016 on page no. 42 of Appeal Memo, it is noted by the TPO that the assessee filed a rectification application raising two points about Manufacturing segment. First point is this that increase in stock was wrongly added instead of reducing the same from operating expenses. Second point noted by TPO is this that as per the assessee, there is inappropriate computation of T P Adjustment on the total turnover of the assessee from manufacturing operations instead of International transactions pertaining to manufacturing operations. But on the next page i.e. page no. 43, the TPO has correctly reduced the amount of increase in stock from operating expenses Rs. 692,55,657/-. The second claim about alleged mistake in computation of T P Adjustment on the total turnover of the assessee from manufacturing operations instead of International transactions pertaining to manufacturing operations was rejected by the TPO. But in addition to this, the TPO has omitted the inclusion of Misc. Income Rs. 525,846/- in Operating Income (OR) without any discussion in this regard. In this order, he has reduced Rs. 15,000/- from operating expenses. In the order dated 09.02.2017 passed by the TPO as order giving effect to DRP order on page 17, Misc. Income of Rs. 525,846/- was not added in operating income. On the same page, it is noted that Donation paid Rs. 15,000/- was reduced from operating expenses as per the order of TPO dated 22.01.2016 but as per Post DRP order, this amount is not reduced from operating expenses although we find that in order dated 29.11.2016 also passed u/s 154, this amount of Rs. 15,000/- was reduced from operating expenses. But we find that on page 13 of DRP order, it is held by DRP by following a tribunal order rendered in the case of SAP Labs India Ltd. in ITA No. 398/bang/2008 that Donation is an operating Expenditure. Hence, in our considered opinion, no opportunity of hearing is required to be given by AO/TPO in this regard and since, learned DRP has followed a tribunal order rendered in the case of SAP Labs India Ltd. (Supra) for deciding this issue, we find no infirmity on this aspect regarding non reduction of Donation from Operative Expenses. But regarding non inclusion of

Regarding Ground No. 7, it is submitted by the learned AR of the assessee in last column of the same Ground wise summary that in A. Y. 2010 – 11 & 2011 – 12, similar issue was decided by the tribunal in assessee’s own case and the matter was restored to AO/TPO in these two years and hence, in the present year also, this matter should be restored to AO/TPO. It was submitted that relevant portion of the tribunal order for A. Y. 2010 – 11 is available on pages 1050 – 1051 of the paper book and relevant portion of the tribunal order for A. Y. 2011 – 12 is available on pages 1080 – 1081 of the paper book. As against this, learned DR of the revenue submitted that A. Y. 2010 – 11 was the first year of operation and A. Y. 2011 – 12 was second year of operation of the assessee and the present year is third year of operation and therefore, earlier tribunal orders cannot be blindly followed. He supported the orders of the lower authorities.

We have considered the rival submissions. We find that in A. Y. 2010 – 11, the tribunal has decided two issues together in respect of abnormal expenditure considered as operating in nature and non allowance of capacity utilization adjustment. In A. Y. 2011 – 12, also, both these issues were decided together by following the earlier tribunal order. In the present year, there is no issue raised before us about non allowance of capacity utilization adjustment. But the issue regarding abnormal expenditure considered as operating in nature is identical and only difference in facts pointed out by the learned DR of the revenue is this that in those two years for which the tribunal order is available, the year involved was first and second year of operation and in the present case, it is third year of operation. This may be a material difference but how it is important in the present case, he could not elaborate. Hence, we feel it proper to restore this issue back to AO/TPO as in those two earlier years with the direction that the AO/TPO should decide this issue afresh after providing

The next ground to be decided by us is Ground No. 11 in respect of not granting of working capital adjustment. In this regard, it is submitted by the learned AR of the assessee in last column of the Ground wise summary that Para 13 of the tribunal order in assessee’s own case for A. Y. 2010 – 11 should be considered to decide this ground. Hence, we reproduce the same from pages 1050 – 1051 of the paper book as under:- “13. The assessee has bench marked its international transactions in manufacturing segment by considering the composite transaction of sale as well as royalty paid to the AE. The TPO has separated the royalty from manufacturing transaction segment and treated the ALP at Nil. We have already set aside the issue of ALP of royalty to the record of the TPO/A.O. As regards the issue raised in the manufacturing segment for non-grant of working capital adjustment abnormal expenditure and non-allowance of capacity utilisation, we find that it is the first year of the assessee’s manufacturing activity then the issue of capacity utilisation adjustment is required to be examined by considering the level of capacity utilisation of the assessee as well as the comparable. Accordingly, we set aside this matter of TP Adjustment in manufacturing segment to the record of the TPO to consider the adjustment on account of capacity under- utilisation as well as excluding the abnormal expenditure. Needless to say that the assessee be given an appropriate opportunity of hearing before deciding the issue afresh.” 9. From the above Para of the tribunal order for A. Y. 2010 – 11, it is seen that in this Para, the tribunal has decided two grounds i.e. Ground No. 3 and 4 which are regarding abnormal expenditure considered as operating in nature and non allowance of capacity utilization adjustment and therefore, this Para is not relevant to decide Ground No. 11 in the present appeal. In addition to this, it is submitted in last column of the Ground wise summary that as per Para 4.7 of the judgment of Hon’ble Karnataka High Court in AY 2007 – 08 also, this issue is covered. This judgment is available on record. We find that in this judgment, it is noted that there are four substantial question of law and out of that,

The next ground to be decided by us is Ground No. 12 in respect of this claim of the assessee that TP adjustment should be restricted to international transactions with AE. In this regard, it is submitted by the learned AR of the assessee in last column of the Ground wise summary that Para 21 to 23 of the tribunal order in assessee’s own case for A. Y. 2010 – 11 available on pages 1060 to 1061 of the paper book and Para 10 of the tribunal order in assessee’s own case for A. Y. 2011 – 12 available on pages 1081 to 1083 of the paper book should be considered to decide this ground. Learned DR of the revenue

We have considered the rival submissions. We find that in Para 23 of the tribunal order for A. Y. 2010 – 11, the tribunal directed the TPO to confine the adjustment to the value of international transaction only. In A. Y. 2011 – 12, the tribunal followed the earlier tribunal order and directed the TPO to confine the adjustment to the value of international transaction only. No difference in facts could be pointed out by the learned DR of the revenue in the present year as compared to these earlier two years and hence, we find no reason to take a different view in the present year. Therefore, respectfully following the earlier tribunal orders, we direct the TPO to confine the adjustment to the value of international transaction only. This ground is allowed.

The next ground to be decided by us is Ground No. 13 in respect of this claim of the assessee that TP adjustment should be determined after allowing +/- 5 percent as available under proviso to section 92C (2) of I T Act. In this regard, it is submitted by the learned AR of the assessee in last column of the Ground wise summary that this legal ground may be remanded back to AO/TPO with the direction to allow this claim as per law. Learned DR of the revenue had nothing to say in this regard. We direct the AO/TPO to examine this claim of the assessee and decide the same as per law. This ground is allowed for statistical purposes.

The next ground to be decided by us is Ground No. 14 in respect of this claim of the assessee that TPO has removed Misc. Income from operating income in relation to Design Engineering Services Segment without giving opportunity to the assessee. Learned AR of the assessee submitted that the arguments are same as are raised in respect of Ground No. 6 for the same claim in respect of Manufacturing Segment. Ground No. 6 was decided as per Para No. 5 above

The next grounds to be decided by us are Ground No. 16 and 24 in respect of this claim of the assessee that in respect of Design Engineering Services Segment, the TPO has wrongly added certain companies as comparables based on unreasonable comparability criteria and wrongly excluded two companies. In this regard, it is submitted by the learned AR of the assessee in last column of the Ground wise summary that direction can be given based on the summary chart submitted by him. As per the said summary chart, the AR of the assessee is requesting for exclusion of four comparables i.e. (1) Hotlec Consulting Pvt. Ltd., (2) Tractebel Consulting Engineers Pvt. Ltd., (3) Mahindra Engineering Services Ltd. & (4) TCE Consulting Engineers Ltd. and requesting for inclusion of two comparables i.e. (1) Tata Elxsi Ltd. and (2) Taneja Aerospace & Aviation Ltd. Regarding the request for exclusion of the first company, i.e. Engineers Pvt. Ltd., he placed reliance on a tribunal order rendered in the case of Bechtel India Pvt. Ltd. vs. DCIT in ITA No. 1477/Del/2015 dated 20.11.2015 for A. Y. 2004 - 05 available on pages 1550 to 1553 of the paper book. Regarding exclusion of the second company i.e. Tractebel Consulting Engineers Pvt. Ltd., the assessee has two objections that this company is functionally different and it has super normal profit. For the third company i.e. Mahindra Engineering Services Ltd., it is submitted that this company has RPT of 53.99% and the TPO has erroneously computed the RPT

We have considered the rival submissions. We find that both these issues were raised by the assessee before DRP as per objection no. 13 and 14. On page 17 of its order, the DRP has also noted that the assessee has objected these four comparables on functionality and for earning super natural profits but learned DRP has passed a cryptic order in this regard by saying that the TPO has examined the objections of the assessee and he has recorded his findings in Para 13.2 of TP order. We find that there is no independent finding of DRP about these two objections raised by the assessee i.e. functionality and for earning super natural profits. Regarding the next ground i.e. Ground No. 24 for inclusion of one comparable i.e. Taneja Aerospace & Aviation Ltd. also, the DRP has passed a cryptic order by saying that TPO has examined the assessee’s request and has recorded his findings with which they are in agreement. Hence, we feel it proper to restore both these matters to DRP for a fresh decision by way of a speaking and reasoned order after providing adequate opportunity of being heard to both sides. Accordingly, Ground No. 14 is allowed for statistical purposes and ground no. 24 is partly allowed for statistical purposes.

The next ground to be decided by us is Ground No. 25 in respect of assessee’s claim that TPO has made incorrect computation of operating margin of companies considered as comparable in its order in respect of design engineering services segment of the assessee. It was submitted that this objection was raised before DRP as per Ground of objection No. 15. But the DRP has simply directed the AO to correct the arithmetical errors in the margin computation of the companies pointed out by the assessee while giving effect to the directions of DRP in the DRP order. He submitted that DRP should have directed to rectify other errors also in margin computation and not only arithmetical errors. He also drawn our attention to page nos. 141 and 142 of the appeal memo and pointed out that the operating margin of M/s. Cades Digitech Pvt. Ltd. is 1.13% and the same for Holtec Consulting Pvt. Ltd. is 48.48% and for Mahindra Engineering Services Ltd. it is 26.77% and for Onward Technologies Ltd. it is 15.21%. But the TPO on page no. 11 of its order has considered operating margin of M/s. Cades Digitech Pvt. Ltd. at 2.92%, for Holtec Consulting Pvt. Ltd. he has considered operating margin at 59%, for Mahindra Engineering Services Ltd. he has considered the operating margin at 30.68%. It was submitted by ld. AR of assessee that this issue may be restored back to the file of AO/TPO/DRP for fresh decision. The ld. DR of revenue supported the orders of authorities below.

We have considered the rival submissions. We find force in this submission of the learned AR of the assessee that this issue may be restored back to the file of AO/TPO for fresh decision after providing opportunity of being heard to assessee. In view of the facts noted above, we feel it proper to restore back the matter to the file of AO/TPO for fresh decision after providing adequate opportunity of being heard to the assessee because only correct operating margin of the comparable should be adopted for the purpose of TP analysis. We order accordingly. This ground is allowed for statistical purposes.

Ground no. 26 is regarding non-granting of working capital adjustment. In this regard, it was submitted by ld. AR of assessee that this issue is covered in favour of the assessee by the judgement of Hon'ble Karnataka High Court in

We have considered the rival submissions. We find that the issue regarding working capital adjustment was raised by assessee before DRP as per Ground of objection No. 7. This issue was decided by DRP on page no. 9 of its order and therein it is held by DRP that when the margin of the case of the assessee as well as comparables are considered by excluding the finance cost, no separate adjustment is required to be given. In our considered opinion, this finding of DRP is not proper because Working Capital Adjustment is not on account of finance cost incurred by the tested party or the comparables. Working Capital Adjustment is for this reason that if more credit is allowed to the customers, high prices are likely to be realised and if more credit period is availed from supplier then it is likely that more prices are to be paid and therefore, in a case where working capital is high, profit is likely to be be higher as compared to a company where working capital is low. In Assessment Year 2010-11 in assessee’s own case, in Para 13 of that Tribunal order in that year, this issue regarding Working Capital Adjustment was restored back by the Tribunal to the file of TPO for fresh decision after providing adequate opportunity of being heard to the assessee. We have already noted that the basis of the decision of DRP in this regard is not proper and hence, we feel it proper to restore back this issue to the file of AO/TPO for fresh decision as per law after providing adequate opportunity of being heard to assessee. We order accordingly. Ground no. 26 is allowed for statistical purposes. 20. The next issue is as per ground no. 27 in respect of non-granting of Risk Adjustment. It is submitted by ld. AR of assessee that this issue can be remanded to the file of AO/TPO for fresh decision after providing opportunity to assessee. The ld. DR of revenue supported the orders of authorities below.

The ld. AR of assessee also submitted that on page no. 147 of the appeal memo is the working of the assessee in respect of assessee’s claim for Risk Adjustment.

We have considered the rival submissions. We find that this issue was raised by assessee before DRP as per Ground of objection No. 16. This issue was decided by the DRP as per para no. 2.13 of its order on pages 18 and 19 of its order. For the sake of ready reference, we reproduce this para from the order of DRP. “2.13 Ground of objection No 16: Risk Adjustment During the course of hearing, the AR submitted that if ground No 11 is decided favourably then the other grounds 12 to 16 become in fructuous as the margin of the assessee from the segment comes to 14.13%. Having decided the ground No 11 in assessee's favour we treat grounds 12 to 16 as withdrawn/rejected. Having considered the submissions, in addition to the reasons given by the TPO, we are of the view that when the arithmetic mean margin is taken of the comparable companies it takes care of the adjustments on account of such differences. Further, the Hon'ble ITAT Mumbai in the case of Symantec Software Solutions Pvt ltd Vs ACIT (2011) 46 SOT 48 (Mumbai) has in paragraph 16 observed that "……………Even otherwise, until and unless such differences results in deflation or inflation of financial result of the comparables, it is not general Rule of standard adjustment. The assessee has not brought on record how such functional difference and risk has influenced the result of the comparables with quantified data to the satisfaction of the authorities". Further, the Hon'ble Delhi ITAT, in the case of Actis Global Services (P) Ltd. v. ITO (2016) 150 TR (B) 809 (Del-Trib), dated 10/12/2015, held that "TPO had denied the risk adjustment claimed by assessee on the ground that assessee failed to show that the comparables had actually undertaken such risk and failed to demonstrate how the same material affected from margins. He pointed out that unless it was shown that how the risk adjustment was to fetch the result of each comparable and how the same would improve the comparability and unless adequate reasons were given for such adjustment, no adjustment could be allowed to taxpayer. Unless the difference could be ascertained accurately and their import on the margin could be assessed with reasonable accuracy, the adjustment could not be allowed." The detailed functional analysis of the companies mentioned by the assessee in its objection has been considered in our directions later on in this order. Accordingly, this objection is not found acceptable and rejected.” 23. From the above para reproduced from the order of DRP, it is seen that it is was noted by DRP that these are the submissions before DRP that if Ground of

We have considered the rival submissions. We find that as per Ground of Objection No. 11, the assessee’s request was for non exclusion of certain non- operating expenses while computing margin of Inteva Bangalore Unit. This request was in respect of various expenses such as loss on sale of fixed assets, donations paid and prior period adjustment of management fees and as per the decision of DRP on page no. 13 of its order, it was held that assessee’s claim is allowable only in respect of sale of fixed assets and other claims are not allowable. Hence this is not proper on the part of the DRP in stating in para 2.13 that Ground of objection No. 11 of assessee’s objections is decided in favour of the assessee. Apart from saying so that this objection is considered as withdrawn / rejected, DRP has made discussion on another aspect of this matter but such discussion and decision is also very cryptic and hence, we feel it proper to restore this matter back to the file of DRP for fresh decision by way of a speaking and reasoned order after providing reasonable opportunity of being heard to both sides. Accordingly ground no. 27 raised by the assessee is allowed for statistical purposes.

Ground no. 28 is regarding transfer pricing adjustment without giving benefit of +/- 5 percent as available under proviso to section 92C(2) of IT Act. Regarding this issue, it was submitted by ld. AR of assessee that this is legal ground and can be remanded back with the direction to allow as per law. The ld. DR of revenue supported the orders of authorities below.

We have considered the rival submissions and we restore this matter back to the file of AO/TPO with the direction to allow this benefit to the assessee as per law after providing reasonable opportunity of being heard to assessee. Accordingly this ground is allowed for statistical purposes.

Regarding ground no. 29 in respect of levy of interest u/s. 234B of IT Act, it was

Now we are left with additional ground nos. 31 and 32. These grounds are as under. “Ground 31- Inappropriately considering miscellaneous income pertaining to manufacturing segment amounting to INR 5,25,846 as non-operating and donation expenses amounting to INR 15,000 as operating in nature

Regarding ground no. 32 also, it is seen that same issue has been raised by assessee as per ground no. 14 which is decided as per para no. 13 above and hence this ground is also not required to be adjudicated upon.

In the result, the appeal filed by the assessee stands partly allowed in the terms indicated above. Order pronounced in the open court on the date mentioned on the caption page.