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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI ANIL CHATURVEDI, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER VIKAS AWASTHY, JM :
These are bunch of four cross appeals by the assessee and Revenue for the assessment years 2010-11 and 2011-12. In ITA No. 493/PUN/2015 the Revenue has assailed the assessment order dated 18-02-2015 passed u/s. 143(3) r.w.s. 144C(13) of the Act for the assessment year 2010-11. The assessee has filed cross appeal against the said assessment order in ITA No. 506/PUN/2015.
The appeal by the assessee in ITA No. 476/PUN/2016 is directed against the assessment order dated 29-01-2016 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2011-12. The Revenue has filed cross appeal against the aforesaid order in ITA No. 515/PUN/2016.
Since, the issues involved in all these appeals are identical and are arising from same set of facts, these appeals are taken up together for adjudication and are being disposed of vide this common order.
ITA Nos.493 & 506/PUN/2015 (A.Y. 2010-11)
The Revenue has raised following grounds assailing the order of Commissioner of Income Tax (Appeals) : “1. Whether on the facts and on the law, the Ld. DRP was right in deleting the addition of Rs.45,00,000/- made by the A.O on account of disallowance out of Capital Cost Allocation of Rs.1,80,22,920/- ? 2. Whether on the facts and on the law, the Ld. DRP was right in deleting the addition of Rs.42,60,057/- made by way of disallowance of Warranty Expenses while relying upon the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs CIT (2009) 314 ITR 62 (Supreme Court) ? 3. The appellant craves leave to add, amend or alter any of the above grounds of appeal.”
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Shri Vishal Kalra appearing on behalf of the assessee submitted that the assessee had claimed deduction amounting to Rs.1,80,22,920/- in respect of Corporate Cost Allocation. The assessee received various specialized services from Eaton Technologies Private Limited (ETPL) – a group concern. ETPL undertakes various functions including human resources, finance, corporate communication, information technology support etc. The resources/facilities procured from ETPL are being leveraged for the benefit of other Eaton group companies in India in order to optimize the specialized skills of the corporate office. The support is provided centrally by ETPL to all group companies. This helps in centralization of all cost, as well as quick support to ensure smooth function of the business without any disruption. The cost incurred by ETPL‟s corporate office is recovered from the group companies utilizing the services on proportionate basis without any mark-up. The assessee had entered into an agreement with ETPL for receipt of such services. The Assessing Officer accepted that the assessee has received services from ETPL, however an ad hoc disallowance of 25% of payments made was disallowed in an arbitrary and unjustified manner. The solitary reason given by the Assessing Officer for disallowance is that the cost allocation to the assessee was not wholly and exclusively for its business. When the issue was agitated by the assessee before the Dispute Resolution Panel (DRP) and the manner and basis for cost allocation was demonstrated, the DRP found merit in the same and hence, allowed the assessee‟s claim. The ld. AR vehemently supported the findings of DRP on this issue and prayed for dismissing the ground No. 1 raised by Revenue. To further substantiate its submissions the ld. AR placed reliance on following decisions :
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i. Orchard Advertising Private Limited Vs. ACIT in ITA No. 1545/Mum/2009 (Mumbai Trib.); ii. Mahendra Oil Cake Industries Pvt. Ltd. Vs. ACIT, 55 TTJ 711 (Ahmedabad Trib.).
3.1 In respect of ground No. 2 of the appeal by Revenue, the ld. AR submitted that the assessee is engaged in manufacture and distribution of hydraulic components. The assessee provides warranty support as per industry practice and past trends in respect of products manufactured. The warranty period varies from 12 to 18 months depending upon the product. The assessee follows accrual system of accounting and having regard to the liabilities that may arise in respect of the sales made during year, it makes a provision for warranty. The assessee made a provision for warranty amounting to Rs.1,03,71,987/- in the assessment year 2010-11. The Assessing Officer in draft assessment order, disallowed Rs.42,60,057/- on the ground that the same is not based on any scientific method. The DRP deleted the said addition. The DRP held that the liabilities of the assessee towards warranties is not disputed. The assessee has followed average of percentage of „Free of Cost‟ dispatches on sales made in last three years. An additional provision of Rs.49 lacs was also made towards warranty for supply made to one of its major customer. The DRP rejected Assessing Officer‟s observation that the provision is not made on scientific basis. The ld. AR vehemently supported the findings of DRP and further substantiate its submissions by placing reliance on the following decisions: i. Rotork Controls India Pvt. Ltd. Vs. CIT, 314 ITR 62 (SC); ii. Calcutta Co. Ltd. Vs. CIT, 37 ITR 1 (SC); iii. Bharat Earth Movers Vs. CIT, 245 ITR 428 (SC).
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On the other hand Shri Rajeev Kumar representing the Department submitted that from the details furnished by the assessee relating to corporate cost allocation as head wise expenses and allocation policy the Assessing Officer observed that the cost allocation does not relate itself to any scientific method or to some specific cause but it is based on discussion between two parties. It is not evident from records that the entire expenditure is wholly and exclusively for business purpose. The allocation of cost is in arbitrary manner and there is no objectivity in cost allocation. Therefore, the Assessing Officer made ad hoc disallowance of 25% of total amount claimed under the head.
4.1 In respect of ground No. 2 relating to disallowance of warranty expenses the ld. DR submitted that while making provision for warranty the assessee has failed to show that the provision was made on some scientific and systematic basis. The assessee has not followed the ratio laid down by the Hon‟ble Supreme Court of India in the case of Rotork Controls India Pvt. Ltd. Vs. CIT (supra) while making provision for warranty provision.
We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The Revenue in its appeal has assailed the assessment order based on the directions of DRP on two counts : i. Deleting of disallowance of Corporate Cost Allocation Rs.45,00,000/- ii. Deleting the addition on account of disallowance of Warranty expenses Rs.42,60,057/-.
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A perusal of documents on record show that ETPL had entered into an agreement with the assessee for providing various services. The ld. AR has pointed that as per cost allocation policy the cost of services is allocated on the basis of head count or any other basis as may be mutually decided by the parties depending on the nature of services. The Assessing Officer has not disputed the receipt of services by the assessee. An ad hoc disallowance of 25% i.e. Rs.45 lacs out of total corporate cost allocation of Rs.1,80,22,920/- has been made by the Assessing Officer for the reason that the allocation of cost has been made on subjective basis. The reasoning for making such disallowance in arbitrary manner is without any merit. Once, the Assessing Officer has accepted the genuineness of expenditure and the services rendered, ad hoc disallowance of 25% of the expenditure on mere presumptions or assumptions is not sustainable. No reasoning whatsoever has been given by the Assessing Officer to show that the expenditure disallowed is not for the business of assessee. We do not find any infirmity in the directions of DRP reversing the findings of Assessing Officer in draft assessment order on this count. Accordingly, ground No. 1 raised in the appeal by Revenue is dismissed.
In ground No. 2 of the appeal, the Revenue has assailed deleting of provision for Warranty expenses Rs.42,60,057/-. The assessee is providing warranty on its product for the period ranging from 12 to 18 months. In assessment year 2010-11 the assessee made provision for warranty amounting to Rs.1,03,71,987/-, out of which the Assessing Officer disallowed Rs.42,60,057/- on the ground that the provision has not been created on scientific and systematic basis. The ld. AR has submitted that in the earlier assessment years and in the subsequent assessment years the provision for warranty made by assessee has not been disturbed.
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The manner and the basis for making the provision in all the assessment years including the assessment year under appeal is identical. This fact has not been disputed by the Revenue. Therefore, we are of considered that the principle of consistency demands the provision created by the assessee for warranty deserves to be allowed. We further observe that the assessee has followed average of percentage of „Free of Cost‟ dispatches on sales made in past three years for creating provision for warranty. In addition the assessee has made provision for Rs.49 lacs towards warranty for supplies made to one of its major customer. The provision for warranty created by the assessee is based on well calculated scientific method. The assessee has made warranty provision in line with the principles enunciated by the Hon‟ble Supreme Court of India in the case of Rotork Controls India Pvt. Ltd. Vs. CIT (supra). Thus, the ground No. 2 raised in the appeal by the Revenue is dismissed.
In the result, the appeal of Revenue for assessment year 20-11 is dismissed.
Now we will take up the appeal of assessee for assessment year 2010-11. The assessee in appeal has raised following grounds : “1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant at INR 7,32,86,650, pursuant to the directions of the DRP, as against returned income of INR 6,09,49,658. 2. That on the facts and circumstances of the case and in law, the AO / DRP / Transfer Pricing Officer ("TPO") has erred in making an upward Transfer Pricing ("TP") adjustment of INR 1,23,36,988 in respect of the international transactions relating to payments made to Associated Enterprises ('AE') for corporate support services, alleging that the same were not at arm's length and determining the arm's length price ("ALP") thereof as 'Nil'. 3. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in rejecting the bench marking analysis
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conducted by the Appellant to benchmark its international transaction of payments made to AEs for corporate support services by using Transactional Net Margin Method ("TNMM") and further erred in determining the ALP of such transaction as 'Nil', which is not in accordance with the prescribed methodology under the Act. 4. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in alleging, interalia, that the Appellant had failed to establish the expertise of the AE to provide such services, cost thereof incurred by the AE and commensurate benefits received therefrom, without appreciating the submissions / evidence furnished by the Appellant in this regard. The AO / DRP / TPO further erred in alleging that the services received by the Appellant on account of 'corporate support services' and 'Eaton Business System' are similar in nature and the Appellant is making payments under two different nomenclatures for the services which are overlapping, which is contrary to the facts of the case. 5. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under sections 234B and 234C of the Act.”
The ld. AR submitted that the primary grounds raised by the assessee in appeal is against transfer pricing adjustment in respect of international transactions pertaining to payments made to Associated Enterprises (AEs) for Corporate Support Services. The authorities below have erred in coming to the conclusion that the assessee has not received any services from AEs and hence, no benefit has been derived by the assessee from the alleged services. The ld. AR submitted that the assessee has furnished copies of the agreements entered into with AEs before the authorities below. The assessee had also furnished various other documents to substantiate the services received by assessee from its AEs in the impugned assessment year. The ld. AR pointed that similar issue had come up before the Tribunal in assessee‟s own case in assessment year 2008-09 in ITA No. 45/PUN/2013 reported as 92 taxmann.com 158 (Pune-TRib.). The Co-ordinate Bench of the Tribunal after analyzing the facts and considering various decisions held that the TPO cannot sit in judgment of business module of assessee and its intention to avail or not
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avail any services from its AEs. The role of the TPO is to determine arm‟s length price of international transactions undertaken by the assessee and whether the same is at arm‟s length when compared with similar transactions undertaken by external entities or internal comparable companies. The ld. AR pointed that the agreements on the basis of which the assessee has received services from its AEs are similar to the one which were subject matter of dispute in assessment year 2008-09. The ld. AR to further supplement his arguments has filed written submissions. The relevant extract of the same are reproduced here-in-below : Submissions: “3.4 Eaton Corporation is a large multinational organization that leverages on the functions of its various locations and businesses throughout the world through regional consolidation of leadership, operational, and administrative functions. It provides centralized support services to its Group companies in an effort to take advantage of economies of scale and lower costs, reduce redundancy of function, standardize processes and procedures, and drive best practices. Without this regional consolidation, these functions would be present at each individual location, like the Assessee, either through increased responsibilities of the existing workforce or through additional headcount. The Assessee has entered into agreements with Eaton China and Eaton Corporation, US for availing the Corporate Support Services. 3.5 The Assessee had entered into a Shared Service Agreement dated November 16, 2009 with Eaton China (Refer to pages 306 to 318 of the paper book). In terms of the Agreement, the Assessee received corporate support services from Eaton China, the nature of which is detailed at Annexure A to the agreement placed at page 318 of the paperbook. The Assessee, during the year under consideration, paid INR 1,12,97,778 for receipt of such services from Eaton China. 3.6 Further, the Assessee had entered into a Shared WHQ Services Agreement dated September 1, 2005 with Eaton Corporation, US (Refer pages 319 to 335 of the paperbook). In terms of the Agreement, the Assessee received corporate support services from Eaton Corporation, US, the nature of which is detailed at Annexure A to the agreement placed at pages 331 and 332 of the paperbook. The Assessee, during the year under consideration, paid INR 10,39,210 for receipt of such services from Eaton Corporation, US. 3.7 Eaton China and Eaton Corporation have computed the service charges by including a mark-up of 5% and 8% on total costs
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respectively, in accordance with the agreements. The CSS charges are consistently applied by the AEs to all the participating entities. 3.8 The Assessee allocated the expenses incurred in respect of receipt of corporate support services from its AE's to manufacturing and trading segment and for the purposes of benchmarking the subject transaction aggregated the portion of payments in respect of corporate support services attributable to the manufacturing segment with the manufacturing segment and portion of payments in respect of corporate support services attributable to the trading segment with the trading segment by applying internal Transactional Net Margin Method ("TNMM") (Refer pages 278 to 280 and 287 to 288 of the paper book). 3.9 At this juncture, kind attention of this Hon'ble bench of the Tribunal is placed on the decision dated March 12,2018 in Assessee's own case for assessment year 2008-09 wherein one of the services i.e. IT enabled corporate support services, were availed by the Assessee under the Shares Services Agreement dated November 16, 2009 (same as in the instant case) and the Revenue authorities had determined the ALP of the said transaction at 'Nil'. The Hon'ble bench of the Tribunal deleted the adjustment by holding as under:
TPO cannot sit in the judgement of business module of assessee and its intention to avail or not avail any services from its associated enterprises. The role of the TPO is to determine arm's length price of international transactions undertaken by the assessee and whether the same is at arm's length when compared with similar transactions undertaken by external entities or internal comparable companies. Reliance in this regard was placed on the decision of the coordinate Bench in the case of Emerson Climate Technologies (India) Limited vs DCIT: ITA Nos. 21821PUN12013 and 2111PUNI2015 (refer Para 29 of the order);
The IT enabled corporate support services availed by the assessee also relate to the business carried on by the assessee and hence, there is merit in the plea of the assessee in aggregating the same with other international transactions undertaken by the assessee with its associated enterprises (refer Para 30 of the order);
The international transaction of IT enabled corporate support services has to be aggregated with other transactions being instrically linked to other transactions undertaken by the assessee during the year and the same has to be benchmarked applying internal TNMM method as in case of other transactions (para Para 38 of the order).
3.10. In view of the above, it is submitted that the Assessee, in the subject assessment year, had also entered into same agreement with its AE for availment of corporate support services. The main contention of the Revenue authorities is that the Assessee has failed to establish the
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expertise of Eaton China and the necessity of availing these services. In this regard, it is submitted that since the factual matrix is identical, the transfer pricing adjustment should be deleted following the decision in Assessee's own case for assessment year 2008-09.”
On the other hand ld. DR vehemently supported the order of DRP/Assessing Officer in respect of transfer pricing adjustment arising from payments made to the AEs in lieu of alleged corporate support services. However, the ld. DR fairly admitted that the issue raised in ground Nos. 2 to 4 of the appeal for assessment year 2010-11 are similar to the one already adjudicated by the Tribunal in assessee‟s own case in assessment year 2008-09.
Both sides heard. Orders of the authorities below perused. The ground No. 1 of the appeal is general in nature, hence, requires no adjudication.
The ground Nos. 2 to 4 of the appeal relate to transfer pricing adjustment amounting to Rs.1,23,36,988/- with respect to international transaction of Corporate Support Services received by assessee from its AE‟s. The authorities below have raised doubt over the receipt of services and the benefit derived from such services. The assessee in order to substantiate receipt of services has furnished various documents which inter alia include the agreements with AEs, E-mails indicating rendering of services, etc. We find that identical issue had come up before the Co- ordinate Bench of Tribunal in assessee‟s own case in assessment year 2008-09. In assessment year 2008-09 as well the Assessing Officer had valued the arm‟s length price of international transactions in respect of payments made to AEs for providing IT services to the assessee as Nil. The ld. AR has clarified that IT services referred in assessment year 2008-09
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and Corporate Support Services are one and the same. There is difference in nomenclature of services only but the nature of services is identical. This fact has not been disputed by the Revenue. The Co-ordinate Bench after considering the facts and various judgments held as under : “28. The question which arises is whether in the given circumstances, the assessee can be held to have availed services from its associated enterprises, for which it had paid sum of ₹ 50,45,303/-. Before adjudicating the admissibility of claim of assessee, it may be pointed out that during the course of TP proceedings, the assessee also filed copy of shared service agreement dated 16.11.2009 which was between the assessee and Eaton China describing the nature of services rendered and basis of charge for services. The agreement which was entered into in 2009 was made effective from 01.01.2005. The terms of said agreement were at variance with the terms earlier agreed upon by the parties and the TPO on such analysis was of the view that no services were availed by the assessee. The stand of assessee in relying on the aforesaid agreement dated 16.11.2009 to establish its case of availing services in financial year 2007-08 is misplaced. The agreement was entered into much after the close of accounting period and even after the due date of filing the return of income for assessment year 2008-09 and hence, the terms of said agreement cannot be relied upon to establish the case of availment of services by the assessee from Eaton China. Accordingly, we find no merit in the stand of assessee and Revenue in relying on the said agreement and we ignore the same for adjudicating the issue raised in the present appeal. 29. Now, coming to the issue of transfer pricing adjustment made by TPO on account of services availed by the assessee from its associated enterprises and taking the value of said international transactions at Nil. In the first instance, we hold that TPO cannot sit in the judgment of business module of assessee and its intention to avail or not to avail any services from its associated enterprises. The role of TPO is to determine the arm's length price of international transactions undertaken by the assessee and whether the same is at arm's length price when compared with similar transactions undertaken by external entities or internal comparables. We have already addressed similar issue in Emerson Climate Technologies (India) Limited Vs. DCIT in ITA No.2182/PUN/2013, relating to assessment year 2009-10 and in ITA No.211/PUN/2015, relating to assessment year 2010-11, order dated 29.12.2017 and observed as under:- “17. We have heard the rival contentions and perused the record. The assessee was 100% subsidiary of Copeland Corporation, USA. The assessee was earlier a company incorporated under the Companies Act and was joint venture of 51:49 between Kirloskar Brother Ltd. (KBL) and Copeland Corporation. M/s. KBL exited the joint venture in June, 2006 and the assessee became wholly owned subsidiary of Copeland Corporation. Post-exit of KBL, there was need to provide operational, strategic and advisory support to the assessee company to ensure that assessee benefit from the manufacturing and operational processes followed by Emerson Group of Companies worldwide. The said support services were provided by Emerson HK and Emerson TH, for which the
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assessee entered into agreement/s with both the parties separately. The aim of providing support services to the assessee was to achieve the following objectives:- Development of new products for the Indian market; Implementation of cost effective and advanced manufacturing processes; Improvement of the financial performance and accounting processes; Establishing robust control and governance processes; Establish best in class HR practices followed throughout the Globe; Develop strong global customer business; and Differentiate itself in the Indian market.
In order to achieve the said objectives, the assessee availed services from its associated enterprises. In this regard, the assessee had furnished various documentary evidences before the TPO, which were in the form of e-mails/presentation, details of visit of personnel of associated enterprises to India, purposes of visit, etc. The assessee has placed on record the said evidences at pages 323 to 898 of the Paper Book i.e. copies of e-mails / presentations and summary containing detailed explanation of the same at pages 911 to 938 of the Paper Book. The assessee had summarized about 100 e-mails justifying the receipt and benefit of services from associated enterprises and filed the same separately with reference to the page nos. of paper book, where these were enclosed. In addition to the same, the assessee had enlisted certain key benefits, which were derived by it on account of payment of fees for advisory and other services in support of which documentary evidence was filed, which are as under:- Key benefits derived Page No. Development of New Products – Aluminium Motor, 333 – 336 Product Sr. No.CR 72 Access to web portals enabling significant cost 551 – 564 reduction such as e-sourcing etc. Assistance in negotiating a beneficial purchasing 487 – 490 rate with suppliers – viz. Bao Steel Cost reduction targets achieved due to e-bidding 533 – 534 platforms implemented Identifying lead for new business opportunities for 587 – 588 ECT India – Examples of support/inputs received for Whirlpool for Indian markets Identifying lead for new business opportunities for 597 – 598 ECT India – Examples of support/inputs received for Blue Star for its Middle East markets Sharing of key data related to competitors such as 565 – 566 Mitsubishi Sharing of key data related to competitors such as 583 – 584 Sanyo
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Assistance in implementation of performance 621 – 622 management system for employees of ECT India, identifying the training needs, etc Access to regional / global information in respect of 539 – 546 suppliers, commodities updates etc Solutions obtained for critical issues such as 613 – 628 unionizations issues with labour, legal cases pending in court, union wages proposals, high attrition rates, e-hiring deployment, etc.
The assessee thus, filed documentary evidence to demonstrate that it had availed services in the field of Human Resources, Marking and Product, Finance, Business Development and Management and other services i.e. support for new product, marketing material, training material and technical support. The assessee has also explained the need for services being in field of operational, strategic and advisory support services. The first aspect which arises in the present appeal is whether the TPO while ascertaining whether price paid for the services is at arm's length price or not, can enter the field of businessman, who is the best judge as to whether it needs to avail the said services. The answer to the same is „No‟. Each businessman is the best judge to come to decision as to whether it needs the said support services or not. Secondly, once such a decision has been taken by the businessman and it provides the evidence of services received by it from its associated enterprises, then the TPO cannot question the same by commenting upon the nature of services provided, where in any case, information is hyper technical. First of all, where the TPO has referred to the services provided and pointed out defects in the services provided, the first step that services have been provided stands established. Once the same is established by way of assessee producing several evidences before the TPO, which were in the form of contemporaneous data, then the TPO is precluded from commenting upon the same and holding that the assessee had not received any services and also there was no need for making any payments for such services, as the services provided were not upto the mark. In any case, the perusal of various evidences filed by the assessee i.e. contemporaneous data available on record shows that it is highly technical and the same has been used by the assessee for carrying on its business activities, such evidence cannot be brushed aside being not upto the mark. The TPO had referred to part of the data and drew conclusion, which is not warranted in any case. 20. Another aspect of the issue which needs to be kept in mind is the developing scenario of carrying on the business in the country. The said business is carried on by the entities which have presence outside India and have certain standards, which are attached to its brand name. In order to maintain its brand value, arrangements are made with different entities across the globe by holding companies, so that different entities operating in different parts of the world adhere to specific rules and regulations while carrying on business under the said brand. The assessee is 100% subsidiary of Copeland Corporation, which admittedly, has presence in various Countries.
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The assessee has placed on record that besides the assessee entering into agreement with Emerson HK, Emerson TH, various entities of other countries had entered into such agreements. The terms of the agreement are similar for providing services, wherein a particular formula is designed by the person providing the services i.e. the basis for remuneration is the cost incurred by way of man hours charged to the entity with mark up of 5.8%. Such method of charging and remunerating was identical in the case of all the entities which were availing the services from Copeland Corporation through Emerson HK and Emerson TH. The assessee had also furnished on record the basis for charging cost by the two entities from the assessee. No doubt, the complete details of operations of the said concerns worldwide had not been filed, but that had no relevance to the activities or services availed by the assessee. There is no merit in the order of TPO in rejecting the segmental details of AEs filed by the assessee vis-à-vis services availed by it. What is to be considered in the hands of assessee is the services it had availed from Emerson HK and Emerson TH and not the whole activities undertaken by the said two concerns worldwide. The assessee had put on record that not only the assessee but many other concerns were availing same services from the two entities and even the basis for remuneration to the said concerns was the same in respect of all the countries. In such circumstances, there is no merit in the order of TPO in holding that as to whether the said concerns have given services or whether they are qualified to give the services and the cost incurred by AEs. First of all, this is outside the domain of TPO. Under the Transfer Pricing Regulations what the TPO has to determine is whether the services which have been provided by associated enterprises are at arm's length price. Accordingly, we find no merit in this part of the order of TPO. 21. In this regard, we find support from the ratio laid down by the Hon‟ble High Court of Delhi in Hive Communication Pvt. Ltd. in Income Tax Appeal No.306/2011, wherein it has been held that the legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It was further held by the Hon‟ble High Court that it was not for the Assessing Officer to dictate what the business needs of the company should be; it is businessman who can only judge the legitimacy of the business needs of the company from the point of view of prudent businessman. Hence, the benefit derived and accruing to the company must also be considered from the angle of prudent businessman. The Hon‟ble High Court clearly held that the term “benefit” to a company in relation to its business has a very wide connotation and it was difficult to accurately measure these benefits in terms of money separately. The said principle laid down by the Hon‟ble High Court has been applied by the Delhi Bench of Tribunal in McCann Erickson India P. Ltd. Vs. Addl.CIT (supra) to hold whether the benefits derived by the assessee, in view of the evidences in respect of management service charges and client coordination fees, cannot be found fault with. 22. Similar proposition has been laid down by the Hyderabad Bench of Tribunal in TNS India Pvt. Ltd. Vs. ACIT (supra), wherein the
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Assessing Officer had not believed the write-up for the services provided and the benefit obtained. The Tribunal held that unless the Assessing Officer steps into assessee‟s business premises and observes the role of the said company or the assessee‟s business transactions, it would be difficult to place on record the sort of advice given in day-to-day operations. Therefore, the order of Assessing Officer/TPO that services were not rendered by the group companies to assessee was negated by the Tribunal. 23. The next stand of the TPO is two-fold; as to what benefits have been received by the assessee against the said support services and intricacy value of services given by the associated enterprises. The said aspect is linked to the issue of whether there is any need for services and in the absence of its establishing the same, whether the TPO / Assessing Officer is correct in determining the arm's length price of transactions at Nil. The assessee had entered into an agreement with its associated enterprises for availing the services because of business benefits arising from such an understanding. Law does not require the assessee to demonstrate the need for availing the services. The assessee is best person to arrange its affairs to conduct the business in the manner it wants and Revenue cannot step into the shoes of businessman to decide what is necessary for the businessman and what is not. The TPO is not empowered to question the decision of assessee to avail support services from the associated enterprises. The decision taken by the assessee in the course of carrying on its business is commercial decision and the TPO cannot question such commercial wisdom of assessee‟s decision. The second linked issue which has been raised is that the assessee did not benefit from such support services where the assessee has shown losses during the year. 24. The Mumbai Bench of Tribunal in Dresser-Rand India (P) Ltd. Vs. Addl.CIT (supra) had held that We have further noticed that the TPO has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by so stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 25. Accordingly, we hold that the TPO while benchmarking the transactions has to determine whether the price paid by the assessee for the services availed is what an independent enterprise would have paid for the same services. The analysis done by the TPO of the nature of services and benefits arising to the assessee on availing such services was beyond the scope of transfer pricing provisions and hence, we find no merit in the same.”
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The second aspect which needs to be considered in the present case is the services availed by assessee from its associated enterprises. The assessee is a group concern of worldwide Eaton group of companies and the intention to avail the said services is to carry out his business on worldwide platform. The total turnover of assessee for the year was ₹ 173 crores and the services availed from associated enterprises were intermingled to the extent that the Tribunal in earlier years has directed that for benchmarking international transactions undertaken by the assessee, import of raw materials for manufacturing purpose and export of finished goods should be aggregated. The information technology services availed by the assessee also relate to aforesaid business carried on by the assessee and hence, we find merit in the plea of assessee in aggregating the same with other international transactions undertaken by the assessee with its associated enterprises. Accordingly, we hold so. In any case, the assessee in the reasons for filing additional evidence has pointed out that information was filed before the TPO along with agreement and certificate of Eaton China, but thereafter, no other query was raised by TPO or any clarification was sought in respect of information technology services availed. The assessee thus, was under the bonafide belief that the documents and explanation furnished by it has been accepted. Further, the assessee before us has pointed out that though it is filing additional evidence but because of confidentiality clause, such information cannot be shared as it would affect the business transactions of assessee. We have gone through the additional evidence filed by the assessee and we are of the view that the assessee has established its case of availment of said services in the field of information technology. In addition, the assessee has also filed certificate from its associated enterprise dated 22.04.2011 i.e. during the course of TP proceedings, under which there is certification of factum of provision of services by Eaton China to the assessee and also basis for charging of such charge i.e. cost plus 5% markup. It was also confirmed by Eaton China that similar services were availed by other Eaton group companies and they were charged on the same basis as in the case of assessee. The assessee had also filed on record copies of debit notes and other JV vouchers raised during the year under consideration justifying its case of availing the said services and payment in lieu thereof. 31. In the above said facts and circumstances in the issue involved, we hold that there is no merit in observations of TPO in holding that the assessee had not availed any services, hence the arm's length price of international transactions is to be adopted at Nil. 32. The learned Departmental Representative for the Revenue had placed heavy reliance on the ratio laid down by Hon‟ble High Court of Delhi in Cushman and Wakefield (India) (P.) Ltd. (supra), which in turn, has also taken into consideration the decision of Mumbai Bench of Tribunal in Delloite Consulting India (P.) Ltd. Vs. DCIT (2012) 137 ITD 21 (Mum). In the facts of the case before the Tribunal, the TPO had determined arm's length price of international transactions at Nil keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in the terms of agreement. The Hon‟ble High Court taking note of the issue before it observed that neither Revenue nor the Court must question the commercial wisdom of assessee or replace its own assessment or commercial viability of the transaction. However, the details of specific activities for such cost was incurred and the attended benefit to the assessee had to be
19 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
considered since the same was not considered, the matter was remanded back to the file of concerned Assessing Officer for arm's length price adjustment by the TPO, in accordance with law. The said judgment is dated 23.05.2014. 33. The Hon‟ble High Court of Judicature at Hyderabad in the case of R.A.K. Ceramics India Pvt. Ltd. (supra) while deciding the issue of fulfillment of conditions of benefit test as raised by the TPO vis-à-vis royalty payments made by assessee @ 3% which was restricted to 2% of net ex-factory sale proceeds, held that it was incumbent upon the TPO after rejecting comparables selected by the assessee to come up with other comparables so as to justify the reduction of royalty payments. Further, no such exercise was undertaken by the TPO and by going into whys and wherefores of the improvement in the net sales and profits of assessee, the TPO held that there was no justification for payment of royalty @ 3% to associated enterprises by the assessee. The Hon‟ble High Court held This reasoning is without legal basis of law as it is not for the TPO to decide the best business strategy for the assessee. The Hon‟ble High Court also held that This whimsical fixation by the TPO amounts to an arbitrary and unbridled exercise of power. Thus, the order of Tribunal rejecting the case of TPO was upheld by the Hon‟ble High Court. 34. The Hon‟ble Bombay High Court in CIT Vs. M/s. Kodak India Pvt. Ltd. (supra) interpreted the provisions of section 92B(2) of the Act. The facts of the case as noted by the Hon‟ble Bombay High Court were as under:- “3. The respondent assessee is an Indian subsidiary of M/s. Eastman Kodak Co. USA (EKC). During the previous year relevant to the assessment year the respondent assessee sold its imaging business to one M/s. Carestream Health India Pvt. Ltd. The buyer company i.e. M/s. Carestream Health India Pvt. Ltd. was a Indian subsidiary of M/s. Carestream Inc. an USA company. The case of the respondent assessee was that the transaction of sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. was a transaction between the two domestic non Associated Enterprises. Hence, the provision of Chapter X of the Act would have no application. Thus, had not even declared this transaction in its 3 CEB report. 4. However the Transfer Pricing Officer (TPO) while examining another Transfer Pricing issue came across the impugned transaction. It held on the basis of Section 92B(2) of the Act that even if the transaction between Kodak India Pvt. Ltd. and M/s. Carestream Health India Pvt. Ltd. was between two domestic non Associated Enterprises, yet it would still be considered to be an International transaction and Chapter X of the Act would be applicable. This on the basis that the holding companies of both the respondent assessee as well as M/s. Carestream Health India Pvt. Ltd. had entered into a global agreement for sale of its business. This global agreement was prior in point of time to the sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. The Assessing Officer passed a draft Assessment order under section 144C of the Act on the basis of the order of the TPO.”
20 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
Two aspects were decided by the Tribunal of section 92B(2) of the Act, which came into effect from 01.04.2015 and prior to that the transaction could not be deemed to be an international transaction. It also held that no addition on account of arm's length price was warranted since the TPO failed to apply any of the methods prescribed under section 92C of the Act. The Hon‟ble High Court vide para 10 held as under:- “10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under section 92C of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92C(1)(f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue.” 36. In the facts of the case before the Hon‟ble High Court of Bombay in CIT Vs. M/s. Lever India Exports Ltd. (supra), the TPO while evaluating the transactions between the parties held that the same were on principal to principal basis and no reimbursement of advertisement expenses by the respondent assessee to its associated enterprises could be allowed. Consequently, he determined the arm's length price at Nil by virtue of disallowing the expenditure. The Hon‟ble High Court in such circumstances observed as under:- “7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO‟s jurisdiction was to only determine the ALP of an International transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO‟s jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and / or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO‟s determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International transaction in terms of Chapter X of the Act read
21 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT(A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained.” (underline provided by us for emphasis) 37. In view of the ratio laid down by the jurisdictional High Court in CIT Vs. M/s. Kodak India Pvt. Ltd. (supra) and CIT Vs. M/s. Lever India Exports Ltd. (supra), the proposition laid down by the Hon‟ble High Court of Delhi (supra) stands modified. 38. Applying the above said principle and in view of the facts and circumstances as referred to by us in the paras hereinabove, we hold the international transactions of information technology services availed has to be aggregated with other transactions being intrinsically linked to other international transactions undertaken by the assessee during the year and the same has to be benchmarked applying internal TNMM method as in the case of other international transactions. Further, we also reverse the order of TPO in holding that the assessee has not availed any services in view of various documents filed by the assessee and also certificate of Eaton China, which was filed during the course of TP proceedings evidencing not only the availment of services but also the basis of cost for such services. Similar services were availed by other Eaton group entities from Eaton China and its certificate that the same has also charged at the same rates as charged to the assessee. In the entirety of the above said facts and circumstances, we reverse the order of TPO / Assessing Officer in taking the value of international transactions of Information Technology Services availed at Nil and delete the adjustment made. Allowing the claim of assessee, the ground of appeal No.8 raised by the assessee is thus, allowed.”
The ld. DR has not able to controvert the findings of Co-ordinate Bench. No contrary decision has been brought to our notice by the Revenue on similar issue. It is also not disputed that the nature of services received by the assessee from the AEs in the assessment year under appeal are in any manner different from the services received by the assessee from its AEs in assessment year 2008-09. Thus, in view of undisputed facts we follow the order of Tribunal in assessee‟s own case and allow ground Nos. 2 to 4 raised in the appeal by assessee in same terms.
22 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
In ground No. 5 of the appeal, the assessee has assailed charging of interest u/s. 234B and 234C of the Act. Charging of interest u/s. 234B and 234C is consequential and mandatory, hence, ground No. 5 raised in appeal by the assessee is dismissed being devoid of any merit.
In the result, the appeal of assessee for assessment year 2010-11 is partly allowed in the aforesaid terms.
ITA Nos. 476 & 515/PUN/2016 (A.Y. 2011-12)
We will first take up the appeal of assessee. The assessee has raised following grounds : “1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant under section 143(3) read with section 144C(13) of the Act, for the relevant AY at INR 26,07,88,637, pursuant to the directions issued by the DRP, as against returned income of INR 20,52,69,089. 2. That on the facts and circumstances of the case and in law, the AO / DRP / Transfer Pricing Officer ("TPO") has erred in making an upward Transfer Pricing ("TP") adjustment of INR 5,55,19,548 in respect of the international transactions pertaining to payments made to the Associated Enterprises ('AE') for corporate support services (“CSS”), alleging that the same were not at arm's length and determining the arm's length price ("ALP") thereof as 'Nil'. 3. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in rejecting the benchmarking analysis and methodology adopted by the Appellant, being Transactional Net Margin Method (“TNMM”) for benchmarking its international transaction of payments made to AEs for receipt of CSS, without providing any cogent reason and further erred in determining the ALP of such transaction as 'Nil', which is not in accordance with the prescribed methodology under the Act. 4. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in making TP adjustment in respect of the international transaction of payments made to AEs for receipt of CSS, alleging that the Appellant had failed to furnish any supporting evidence/documents to establish the receipt of services and commensurate benefits realized thereof, without appreciating the submissions/evidence furnished by the Appellant in support of the said claim.
23 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
That on the facts and circumstances of the case and in laws, the TPO has erred in equating the payments made to Eaton Technology Pvt. Ltd. (“ETPL”) with payment for CSS. The TPO further erred in alleging that services received by the Appellant on account of CSS and costs paid to other AEs are similar in nature and thereby wrongly concluding the ALP of the international transaction as „Nil‟. 6. That on the facts and circumstances of the case and in law, the AO has erred in levying interest under sections 234B and 234C of the Act.”
The ld. AR submitted that the issue raised by the assessee in appeal for assessment year 2011-12 is identical to the one raised in assessment year 2010-11. Therefore, the submissions made for assessment year 2010-11 would hold good for assessment year 2011-12 as well.
The ld. DR concurred with the fact that the issue raised by assessee in appeal for assessment year 2011-12 are similar to assessment year 2010-11. The value of services rendered by AEs to assessee have been valued at „Nil‟ for identical reasons. However, the ld. DR supported the findings of DRP in respect of TP adjustment.
Both sides heard. Orders of the authorities below perused. The ground No. 1 raised in the appeal is general in nature, hence, requires no adjudication.
The issue raised in ground Nos. 2 to 5 of the appeal are identical to the ground Nos. 2 to 4 raised by the assessee in assessment year 2010-11 assailing transfer pricing adjustment in respect of payments made to AEs for Corporate Support Services. The assessee has made payment to the tune of Rs.5,55,19,548/- to its AEs. The TPO has determined the arm‟s length price of the services at Nil. The DRP/Assessing Officer has upheld the findings of TPO. The reasons for determining the arm‟s length price of
24 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
the services at „Nil‟ is identical to the reasons given by the TPO in assessment year 2010-11. For the sake of brevity and to avoid repetitiveness, we are not reproducing the same. The findings given by us while adjudicating ground Nos. 2 to 4 for assessment year 2010-11 would mutatis mutandis apply to the ground Nos. 2 to 5 raised by assessee in assessment year 2011-12. For the detailed reasons given while adjudicating the appeal for assessee in assessment year 2010-11 the ground Nos. 2 to 5 raised in the appeal in the present appeal are allowed in similar terms.
In ground No. 6 of the appeal, the assessee has assailed charging of interest u/s. 234B and 234C of the Act. Charging of interest u/s. 234B and 234C is consequential and mandatory, hence, ground No. 6 raised in appeal by the assessee is dismissed being devoid of any merit.
In the result, the appeal of assessee for assessment year 2011-12 is partly allowed in the aforesaid terms.
The Revenue in its appeal for assessment year 2011-12 has assailed the assessment order on following grounds : “1. Whether on the facts and circumstances of the case, the DRP was justified in considering the internal TNMM as most appropriate method for determining ALP of assessees international transactions pertaining to manufacturing activities, in the case when assessee's both AE and non-AE segment consists of AE transactions. Whether the data of comparison available can be considered as reliable for transfer pricing analysis? 2. Whether on the facts and circumstances of the case, the DRP was justified in directing the AO /TPO to recomputed TP adjustment by considering the margin of AE segment and not the overall margin of the entire manufacturing activity without appreciating the fact that no separate profitability of transactions with AE and transactions with non AE is available and assessee has determined profitability by applying certain allocation keys which is not accurate and reliable?
25 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
Whether on the facts and circumstances of the case, the DRP was justified in directing that proportionate adjustment is required to be made to arrive at the net margin of the international transaction without appreciating the fact that no separate profitability of transactions with AE and transactions with non AE is available and assessee has determined profitability by applying certain allocation keys which is not accurate and reliable? 4. Whether on the facts and circumstances of the case, the DRP was correct in not appreciating the fact that in absence of any authentic and reliable data there arises practical difficulty in computing Working Capital Adjustment? 5. Whether on the facts and circumstances of the case, the DRP was right in deleting the addition of Rs. 67,00,000/- made by the AO on account of disallowance out of Capital Cost Allocation? 6. The appellant craves leave to add, amend or alter any of the above grounds of appeal.”
In respect of ground Nos. 1 to 3 of the appeal the ld. AR submitted that the Co-ordinate Bench of the Tribunal in assessee‟s own case for assessment year 2007-08 reported as 56 taxman.com 135 has upheld the adoption of internal TNMM for benchmarking manufacturing segment. Thereafter, in the assessment year 2008-09 similar issue had come up. The Co-ordinate Bench following its own decision in assessment year 2007-08 upheld internal TNMM for the purpose of benchmarking international transactions of purchase of raw material and components from AEs as well as sale of finished goods effected to AEs. The Tribunal further observed that since the profitability under the AE segment was higher than that of the transactions under third party segment, no adjustment on account of arm‟s length price was required to be made. The ld. AR submitted that there has been no change in the facts of the case vis- à-vis assessment years 2007-08, 2008-09, 2009-10 and 2010-11. Hence, on principle of consistency the ground Nos. 1 to 3 raised by Revenue deserves to be rejected.
26 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
In respect of ground No. 4 of the appeal by the Revenue the ld. AR submitted that if ground Nos. 1 to 3 are dismissed, the ground No. 4 would become academic.
In respect of ground No. 5 relating to expenditure on Corporate Cost Allocation the ld. AR submitted that ground No. 5 is identical to ground No. 1 raised by the Revenue in assessment year 2010-11. The submissions made in respect of said ground would apply to ground No. 5 of the present appeal as well.
The ld. DR vehemently defended the findings of TPO with respect to the grounds raised in ground Nos. 1 to 4 by the Revenue. However, the ld. DR fairly admitted that the issue raised in ground Nos. 1 to 4 by the Revenue is similar to the one adjudicated by the Tribunal in assessee‟s own case in ITA No. 1623/PN/2011 for assessment year 2007-08.
Both sides heard. Orders of the authorities below perused. The Revenue in ground Nos. 1 to 3 of the appeal has assailed adoption of internal TNMM as the most appropriate method for determining arm‟s length price of international transactions under manufacturing segment. We find that similar issue had come before the Co-ordinate Bench of the Tribunal in assessment year 2007-08. The Tribunal upheld internal TNMM as the most appropriate method for manufacturing segment by observing as under : “12. We have carefully considered the rival submissions. The dispute on this aspect relates to a plea put-forth by the assessee during the course of the proceedings before the TPO whereby assessee canvassed that the international transactions in the Manufacturing segment be benchmarked by using internal TNM Method. No doubt, in the Transfer Pricing Study carried out by the assessee initially it had adopted the external comparability on an aggregated segment of Manufacturing plus Trading activities. The TPO had rejected the aggregation of the two activities and benchmarked the
27 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
Manufacturing segment independent of the Trading segment. At that stage, assessee put-forth a plea that the benchmarking of the Manufacturing segment be carried out by using the internal TNM Method. Before the TPO, assessee pointed out that in the Manufacturing segment, the products manufactured by assessee consumed various raw materials and components, which were procured domestically from third parties as well as imported from associated enterprises and overseas third parties. Assessee segregated the products which did not consume raw material and components procured from associated enterprises from those products which consumed such raw material and components. Similarly, assessee separately identified the sales of these products. Primarily, assessee identified sales of products which neither had any consumption of raw material and components procured from associated enterprises and nor sold to the associated enterprises. This segment comprised of gear pumps and cylinders and it was accordingly considered as Third party segment. The operating margin in the said segment was determined at 2.80% in terms of the Tabulation which is placed in the Paper Book at page 114. The balance sales comprising of other products, namely, vane/piston, pumps, power units, cylinders control valves, etc. which entailed consumption of raw material and components purchased from associated enterprises were identified as the associated enterprises segment. This segment also included some gear pumps and cylinders which did not consume raw material and components procured from associated enterprises though the sales were to the associated enterprises. The operating margin in the associated enterprises segment in the Manufacturing segment was thus computed at 3.2% in terms of the Tabulation, a copy of which has been placed in the Paper Book at page 114. The aforesaid profitability statement showed that the profitability from transactions with associated enterprises was higher than the profitability of the transactions with the third parties. We find that assessee also asserted before the TPO that both the segments, namely, the associated enterprises segment and the third parties segment were functionally comparable in every aspect. Therefore, it was canvassed that based on the aforesaid internal TNM analysis, the international transactions of the assessee in the Manufacturing segment were at an arm's length price. 13. In-fact, the internal comparables do have a more direct and closer relationship to the tested transactions rather than the external comparables. In other words, the profitability of an assessee from the controlled transactions can be benchmarked more meaningfully with reference to the assessee‟s profitability from similar transactions carried out in uncontrolled conditions, i.e. with third parties. In the present case, assessee pointed out that the associated enterprises segment and the third parties segment were functionally comparable and therefore the third parties segment was a good uncontrolled comparable available to benchmark the international transactions entered with the associated enterprises. 14. Pertinently, assessee also undertook similar analysis with regard to its Trading segment before the TPO. In the Trading segment also, assessee tabulated the associated enterprises segment and the third parties segment and pointed out that the operating margin in the associated enterprises segment was higher than the operating margin in the third parties segment. The said calculation is a part of the Tabulation furnished to the TPO, a copy of which has been placed in the Paper Book at page 114. This approach of
28 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
the assessee was similar to the approach in relation to the Manufacturing segment as discussed earlier. In so far as the international transactions entered with the associated enterprises in the Trading segment are concerned, the TPO was satisfied that they are at an arm's length price as no adjustment has been proposed by him. However, similar approach taken by the assessee with respect to the Manufacturing segment has not been accepted by the TPO. In our considered opinion, the grounds taken by the TPO to reject the assessee‟s plea for internal TNM comparable are neither germane and nor justified, apart from being inconsistent with his stand relating to similar situation in the Trading segment. We find from a copy of submissions dated 14.09.2010 addressed to the TPO, a copy of which has been placed in the Paper Book at pages 599 to 603 that assessee had explained the manner in which the bifurcation of Manufacturing segment was done into associated enterprises segment and the non-associated enterprises segment. The following averments made by the assessee are worthy of notice :- “As explained during the hearing held on August 31, 2010, the Company manufactures certain products which do not entail consumption of any raw material imported from AEs. Thus, further split of manufacturing segment into AE and Non-AEY segment was done on a product basis i.e. products, manufacturing of which requires raw material imported from AE (categorized as 'AE segment1) and products, manufacturing of which does not require raw materials imported from AEs (categorized as 'Non-AE segment‟). The Non-AE segment represents the profitability made by the company from manufacture and sale of products which do not entail consumption of any raw material imported from AEs. The AE segment represents the profitability from manufacture and sale of products which entail consumption of raw materials from AEs. While preparing the AE and Non-AE segment, the revenue and costs to the extent identifiable are determined based on actual. The common costs I expenses, being insignificant portion of total operating expenses, as explained above were allocated considering net sales of each segment as the reasonable allocation key. Your good self would appreciate that Transactional Net Margin Method ('TNMM') requires a functional similarity rather than product similarity. Thus, under both the aforesaid segments, there is a functional similarity viz. manufacturing function though the product may not be identical. In view of the above, the internal comparability of profit from sale of manufactured products under AE and Non-AE segment would be the most appropriate method to benchmark the international transactions pertaining to manufacturing segment.” 15. The aforesaid shows that the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment was done by the assessee on product basis, i.e. the associated enterprises segment reflect profitability on products which require consumption of raw material and components from associated enterprises whereas the Third parties segment reflects profitability from products which do not entail purchases of raw materials and components from associated enterprises. The TPO has pointed out that the sale of finished goods in the associated enterprises
29 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
segment includes a component of sale of Rs.8,37,000/- of products which do not consume any raw material or component purchased from associated enterprises. The assessee had explained that this was a minor transaction involving Gear pumps & Cylinders out of total sales of finished goods to associated enterprises of Rs.2.36 crores (approx). It was explained that profitability of this minor transaction was included in the associated enterprises segment to ensure comprehensive benchmarking of international transaction of sales to the associated enterprises. In our considered opinion, the said minor transaction does not vitiate the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment done by the assessee for the purpose of internal TNM Method. 16. On the basis of the aforesaid, we find that the bifurcation of Manufacturing segment into associated enterprises and the third parities done by the assessee is fair and apt. The TNM Method does not envisage an absolute product similarity but rather emphasizes on functional similarity. Quite clearly, in the associated enterprises segment as well as the third party segment in the Manufacturing segment there is a functional similarity and therefore the internal TNM Method comparable professed by the assessee was wrongly rejected by the TPO. Before we parting on this issue, we would also refer to the following analysis of the segmentation in Manufacturing segment canvassed by the assessee before the TPO vide communication dated 28.10.2010 :- “The profitability of the international transaction pertaining to purchase of raw material and components from AEs (approximate transaction value Rs.8.32 crores) is reflected in the operating margin of the AE segment, since the transaction forms a part of the same. (This includes the profitability of the minor sale transaction of Rs.8.37 lakhs to AEs of products that do not entail consumption of raw material and components purchased from AEs. The balance sales of Rs.2.28 crores entail consumption of raw material and components purchased from AEs and are automatically covered in this segment.) The profitability of comparable transaction pertaining to purchase of raw material and components purchased from third parties is reflected in the operating margin of the Third party segment. The operating margin derived from the international transaction pertaining to purchase of raw material and components purchased from AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment). The operating margin derived from the international transaction pertaining to sale of finished products to AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment).”
On the basis of the aforesaid fact analysis, which has not been controverted by the TPO, we find that in the present case internal comparison of the operating margins using internal TNM Method is liable to be upheld in order to compute arm's length for the international transactions
30 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
of purchase of raw material and components from associated enterprises as well as sales of finished goods effected to the associated enterprises. On the basis of the aforesaid benchmarking, the profitability of international transactions under the associated enterprises segment computed at 3.25% is higher than the profitability of transactions under the Third parties segment computed at 2.80%. Hence, the international transactions entered with the associated enterprises under the Manufacturing segment on account of purchase of raw material and components and also sales are consistent with the arm's length price and no transfer pricing adjustment is thus required to be made. On this aspect, we uphold the plea of the assessee and accordingly, the Ground of Appeal No.2 raised by the assessee is allowed.”
The ld. DR has failed to controvert the findings of Co-ordinate Bench in assessee‟s own case in assessment year 2007-08. We find that identical issue was raised in assessment year 2008-09 in assessee‟s own case. The Tribunal following its order for assessment year 2007-08 decided the issue in favour of the assessee. No contrary judgment has been brought before us by the Revenue. Therefore, following the decision of Tribunal in assessment years 2007-08 and 2008-09 we dismiss ground Nos. 1 to 3 raised by the Revenue.
In ground No. 4 the Revenue has assailed computation of working capital adjustment in absence of reliable data. Since, we have allowed the adoption of internal TNMM as the most appropriate method the relief sought by the Revenue in ground No. 4 of the appeal has become academic and hence, the same is not deliberated upon.
In ground No. 5 the Revenue has assailed deleting the addition of Rs.67,00,000/- made on account of disallowance of Capital Cost Allocation. We find that the ground No. 5 raised in the appeal is identical to ground No. 1 of the appeal by Revenue for assessment year 2010-11. The Assessing Officer has disallowed Rs.67,00,000/- on ad hoc basis for the similar reasons as was done in assessment year 2010-11. For the
31 ITA Nos. 493 & 506/PUN/2015 and 476 & 515/PUN/2016
detailed reasons given while adjudicating ground No. 1 of the appeal for assessment year 2010-11, the ground No. 5 in the present appeal is dismissed.
In the result, the appeal of Revenue for assessment year 2011-12 is dismissed being devoid of any merit.
To sum up, the appeals of Revenue for both the assessment years i.e. assessment years 2010-11 and 2011-12 are dismissed and the appeals of assessee for assessment years 2010-11 and 2011-12 are partly allowed.
Order pronounced on Monday, the 15th day of October, 2018.
Sd/- Sd/- (अननऱ चतुवेदी / Anil Chaturvedi) (ववकास अवस्थी / Vikas Awasthy) ऱेखा सदस्य / ACCOUNTANT MEMBER न्यानयक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 15th October, 2018 RK आदेश की प्रनतलऱवऩ अग्रेवर्त / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The Dispute Resolution Panel-3, Mumbai 4. The CIT (IT/TP), Pune ववभागीय प्रनतननधध, आयकर अऩीऱीय अधधकरण, “ए” बेंच, 5. ऩुणे / DR, ITAT, “A” Bench, Pune. गार्ड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रनत // True Copy// आदेशानुसार / BY ORDER,
ननजी सधचव / Private Secretary, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune