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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI INTURI RAMA RAO
Per N.V. Vasudevan, Judicial Member This appeal is by the assessee against the order of CIT(Appeals)-3, Bengaluru dated 12.09.2017 for the assessment year 2013-14.
The assessee is engaged in the business of manufacture and trading of laboratory and processing equipment. The assessee imports products from IKA Group for sale in the domestic market and also undertakes manufacturing operations locally to export the products to IKA Group. In addition, the assessee also provides research and development
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services and marketing and technical support services to Group companies.
The Assessee filed its return of income on 30th November 2013, declaring a taxable income of Rs.82,39,710. The following were the international transactions entered into by the assessee with its Associated Enterprise (AE) during the relevant previous year:-
Nature of International Transaction Amount (Rs.) Import of raw materials and components 8,53,90,600 14,40,84,509 Export of finished goods Purchase of traded goods 2,62,99,700 2,59,94,545 Provision of marketing support services Provision of research and development fees 6,29,16,160 2,06,19,173 Payment of royalty 16,65,636 Payment of interest on loan Payment of personnel support fees 2,42,63,031 Purchase of fixed assets 18,84,045 68,71,417 Reimbursement of expenses to AE
In view of the provisions of section 92 of the Income-Tax Act, 1961 [“the Act”], income from an international transaction had to be determined having regard to the arm’s length price (ALP). The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO accepted that all international transactions carried out by the assessee was at arm’s length, except the international transaction of export of finished goods by the assessee to its AE. The dispute raised in this appeal which is one of the subject-matter of this appeal is with regard to this international transaction. For the purpose of establishing the ALP of its international transaction with its AE, the assessee filed a Transfer Pricing (TP) study. The assessee chose the Transactional Net Margin Method ("TNMM") as the most appropriate method. In order to identify companies which are
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comparable to the assessee, search was conducted on Capitaline database (a database compiled and managed by Capital Market Publishers) for obtaining publicly available financial information of companies in India engaged in similar business activity as the assessee. The Profit Level Indicator (PLI) chosen for the purpose of comparison of assessee’s profit margin with that of comparable companies was Operating Profit to Operating Cost (OP/OC). For the companies identified as comparables, operating margin was computed using the financial data pertaining to FY 2012-13 which was available to the assessee at the time of complying with the transfer pricing documentation requirements. The operating margin of the assessee was adjusted for under-utilization of capacity during FY 2012-13 as compared to the comparables. The adjusted net margin of the assessee was determined as 18.97 percent on operating cost and 15.95 percent on operating revenue. The operating margins of the comparable companies were adjusted to account for differences in the level of trade receivables and trade payables of the comparable companies vis-a-vis the assessee.
In connection with the international transaction of export of finished goods, the above analysis yielded a set of 3 comparables with arithmetic mean of the adjusted net margins of the comparable companies being 4.77% on operating revenue and 4.80% on operating cost. As the assessee’s net margin of 18.97% on operating revenue and 15.95% on operating cost was greater than operating margin earned by the comparable companies, the assessee claimed that the international transaction of export of finished goods was to be considered to be at arm's length in accordance with the Indian transfer pricing regulations.
The list of 3 comparables chosen by the assessee were :-
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S.No. Margin Margin Accepted/ Rejected by Particulars (OP/OR) (OP/OR) the TPO (%) (%) 7.10% Accepted 1 Allengers Medical Systems 6.97% Limited 2 Gansons Limited 2.99% 3.00% Rejected Rejected 3 Systronics India Ltd.(Seg.) 4.36% 4.38% 4.77% 4.80% Arithmetic Mean
As already stated, the TPO accepted the price paid or received by the assessee in all the international transactions as at arm’s length, except the international transaction in relation to the manufacturing activity with its AE. The learned TPO did not accept the economic analysis undertaken by the assessee and conducted a fresh economic analysis. The TPO rejected 2 companies out of 3 companies selected as comparables by the assessee in the TP Study. The TPO on his search of the database chose 12 new companies and selected the following 13 companies as the final set of comparables with unadjusted margin of 8.61% on operating revenue:-
S.No. Margin Margin (OP/OR) (OP/OC) Particulars (%) (%) 1 Hindustan Syringes & Medical Devices 10.14 11.28 Ltd. 2. Artificial Limbs Mfg. Corporation of India 16.90 20.34 3. Allengers Medical Systems Ltd. 9.88 10.96 4. Elico Limited 12.99 14.93 2.20 2.25 5. Premier Medical Corporation Pvt. Ltd. 6. Centenial Surgical Suture Ltd. 6.72 7.20 18.52 7. Blue Neem Medical Devices Pvt. Ltd. 15.63 8. Iscon Surgicals Ltd. 8.83 9.68 9. Johari Digital Healthcare Ltd. 5.75 6.10 10. Hemanth Surgical Industries Ltd. 7.01 7.54 11. Shree Pacetronix Ltd. 8.73 9.57 12. Continental Controls Ltd. 8.24 8.98 13 Care Medical Devices Ltd. - 1.14 - 1. Arithmetic Mean 8.61 9.7 1
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The TPO considered foreign exchange gain/losses as non-operating in nature while computing the operating margin of the comparable companies. However, he considered the foreign exchange gain/losses as operating in nature while computing the operating margin of the assessee. The TPO did not make suitable adjustments to account for differences in the working capital position of the assessee vis-à-vis the comparable companies. The TPO also did not make suitable adjustments to account for under-utilized capacity of the assessee vis-a-vis the comparable companies. The TPO computed addition to the total income consequent to determination of ALP as follows:-
“4.20 In view of the discussions made above, the TPO in the case of the taxpayer proceeds to make adjustment u/s 92CA of the Income-tax Act, 1961 using the set of 13 uncontrolled comparables as above with average PLI (OP/OC%) of 8.61% as under: Particulars Amount Rs. Operating Cost 39,20,72,536
Arm's length mean margin 8.61% Therefore Arm's Length Price is 108.61% of Operating 42,58,29,981 Revenue 40,08,75,618 Operating Revenue
2,49,54,363/- Excess cost being adjustment u/s 92CA
Aggrieved by the order of the TPO whose directions were incorporated in the order of assessment of the AO, the assessee preferred appeal before the learned CIT(A).
The CIT(A) did not provide any relief to the assessee on the transfer pricing matter. The approach of the CIT(A) while disposing assessment, in
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determining the ALP of the assessee in relation to the manufacturing activity with its AE can be summarised as below:-
• The CIT(A) directed the TPO to re-compute the operating margins of the Assessee and the comparable companies. • The CIT(A) directed the AO/TPO to consider “Analytical Instrument” segment of Elico Ltd., for margin computation and comparability purpose. • In respect of the other grounds, the CIT(A) primarily agreed with the TPO's approach and did not appreciate the Assessee's submission. • In addition to the above, the CIT(A) directed the TPO to re- compute the operating margins of the comparable companies and the Assessee by considering operating profit on operating cost as profit level indicator. 11. Aggrieved against the order passed by learned CIT(A), the Assessee has preferred an appeal before the Tribunal on the following grounds of appeal.
Grounds of general nature
Ground 1: The order of the learned CIT(A) is based on incorrect interpretation of law and facts and therefore is bad in law; Grounds of appeal relating to transfer pricing matters
Ground 2: The learned CIT(A) has erred in making an addition to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") relating to the manufacturing activity entered into by the Appellant with its Associated Enterprises ("AEs") thereby holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax act, 1961 (the "Act"); Ground 3: The learned CIT(A) has erred in law and facts by upholding the action of AOTTPO in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the
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Income-tax Rules, 1962 ("Rules"), and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length. 12. On ground Nos. 2 & 3, it was submitted that on a plain reading of Section 92C(3) of the Act, it is clear that the AO can determine the price only under the circumstances enumerated in clauses (a) to (d) of this section. The assessee submitted that it was not provided with any information, based on which, it was considered necessary to determine an ALP different from the ALP determined by it. Accordingly, in the absence of any information to the contrary, the learned TPO was not justified in refuting the transfer pricing analysis undertaken by the assessee in accordance with the provisions of the Act read with the Rules.
We do not agree with the submission of the ld. counsel for the assessee and are of the view that the reasons given in the order of TPO sets out the grounds for rejecting the TP study of assessee. It is a different issue as to whether those reasons are sustainable. Ground Nos.2 & 3 are therefore dismissed.
Ground 4: The Learned CIT(A) has erred in law and facts by upholding the action of AO/TPO in determination of the Arm’s length margin or price using only FY 2012-13 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements: 14. In the written submissions at page-7 reference was made to some judicial precedents. However, in the chart filed before us at the time of hearing, no specific arguments were advanced nor any oral submissions made on Gr.No.4 and hence, Gr.No.4 is dismissed.
Ground 5: The learned CIT(A) has erred, in law and in facts, by considering the following companies as functionally similar to the Appellant and failed to appreciate the fact that the following companies are not functionally comparable:
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a) Hindustan Syringes and Medical Devices Limited b) Artificial Limb Manufacturing Corporation of India c) Allengers Medical Systems Limited d) Elico Limited e) Centenial Surgical Suture Limited f) Blue Neem Medical Devices Private Limited g) Iscon Surgicals Limited h) Hemant Surgicial Industries Limited i) Shree pacetronix Ltd. j) Continental Controls Ltd.
Ground 6: The learned CIT(A) has erred, in law and in facts, by considering the following companies as functionally dissimilar to the Appellant and failed to appreciate the fact that the following companies are functionally comparable: Systronics India Limited a) Gansons Limited b)
Gr.No.5 & 6 are on the action of TPO in including 10 comparable companies and in excluding 2 comparable companies chosen by the Assessee in its Transfer Pricing Study. At the time of hearing it was agreed by the parties that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee’s own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee’s own case ruled regarding inclusion of the following comparable companies in favour of the Revenue with the following observations:
“14. It was argued that Shree Pacetronix should be rejected on account of the difference in products manufactured by Shree Pacetronix vis-a-vis the assessee. It was argued that as per the annual report of the company for FY 2011-12, the company was engaged in manufacturing and marketing of Pacemakers. Since Shree Pacetronix was engaged in manufacturing life saving devices such as pacemaker which is used to support or enhance the functions of heart by implanting in the heart, this company cannot be considered as a comparable to the assessee engaged in
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manufacturing of laboratory and processing equipments which are completely different line of products. 16. We have considered the submissions of the ld. AR and are of the view that the contentions are not acceptable. Under Rule 10B(2) of the Income-tax Rules [the Rules], comparability of the international transaction with an uncontrolled transaction has to be judged keeping in mind the specific characteristics of the property transferred in either transaction. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
The OECD guidelines on the aspect of Specific Characteristics of the property transferred in either transaction has taken the view that differences in the specific characteristics of property or services often account, at least in part, for differences in their value in the open market. Therefore, comparisons of these features may be useful in determining the comparability of controlled and uncontrolled transactions. The said guideline also says that differences in the characteristics of property or services are also less sensitive in the case of the transactional profit methods than in the case of traditional transaction methods. Product difference to the extent they affect comparability on functions performed, assets used and/or risks assumed by the tested party, would be relevant. In practice, comparability analyses often put more emphasis on functional similarities than on product similarities. It may be acceptable to broaden the scope of the comparability analysis to include transactions involving products that are different, but functionally similar. The acceptance of such an approach depends on the effects of the product differences on the reliability of the comparison and on whether or not more reliable data are available. In other words, it cannot be said that product difference is a factor which needs to be either ignored or strictly followed. It depends on facts and circumstances of each case.
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In the present case, the fact that the product manufactured by the tested party i.e. the Assessee viz., laboratory and processing equipment and the comparable company i.e., Shree Pacetronix viz., manufacture of pacemaker for implanting in heart, can be categorized as “manufacture of equipment”. The relevancy of the end use of equipment whether by consumer or as component may be relevant while evaluating functional dissimilarity, Assets employed and risks assumed but not on the basis of characteristics of the property transferred under Rule 10B(2)(b) of the Rules. 19. For the reasons given above, we are of the view that Shree Pacetronix was rightly not excluded for the purpose of comparison on the ground of product difference. 20. The grounds on which Assessee seeks exclusion of (i) Continental Controls Limited; (ii) Hindustan Syringes and Medical Devices Limited; (iii) Centenial Surgical Suture Limited; (iv) Allengers Medical Systems Limited are identical to the ground on which the Assessee sought exclusion of Shree Pacetronix. For the reasons given above, we are of the view that the Revenue authorities were justified in retaining the aforesaid companies are comparable companies and need not be excluded on the ground that they were manufacturing different products compared to the Assessee. 21. The Assessee sought inclusion of M/s.Ganson Limited and Span Diagnostics Limited which was a comparable chosen by it in its Transfer Pricing Study. The TPO took the view that these companies are into engineering and manufacture of diagnostic products and therefore cannot be regarded as comparable. The CIT(A) upheld the view of the TPO. For the reasons given for rejecting the request of the Assessee for excluding comparable companies chosen by the TPO in the earlier paragraphs, we are of the view that these two companies should be included in the list of comparable companies. The learned DR has made submission before us that these two companies manufacture products that are not ultimately consumed but used as components of other products. She pointed out that the Assessee in its TP study for AY 13-14 has adopted such an approach while excluded a company Core Medicals. We have already held that such bifurcation can be seen only at the stage of functions performed, assets employed and risks assumed and not at the stage of characteristics of property transferred in either transaction. We therefore direct that these two
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companies be included in the list of comparable companies for the purpose of comparison. Gr.No.4 & 5 are decided accordingly.”
Following the aforesaid ruling, we hold that the following companies were rightly included by the TPO as comparable companies.
a) Shree Pacetronix Limited b) Continental Controls Limited c) Hindustan Syringes and Medical Devices Limited d) Centenial Surgical Suture Limited e) Allengers Medical Systems Limited It is not disputed before us that the above ruling will apply to comparable companies chosen by TPO, viz., Iscon Surgicals Ltd. and Hemant Surgical Industries Ltd. also and therefore the inclusion of these companies by the TPO in the list of comparable companies has to be upheld. Similarly, following the precedent in Assessee’s own case, we hold that M/S.Gansons Ltd., and M/S.Systronics India Ltd., comparable chosen by the Assessee which was rejected by the TPO because of difference in products manufactured should be included as comparable company.
The remaining companies in the list of companies which was added by the TPO and whose inclusion is challenged by the Assessee in Gr.No.5 will now be taken up for consideration.
Artificial Limb Manufacturing Corporation of India, which is a comparable company chosen by the TPO was challenged as not comparable company for the reason that it was a Government company. This argument is liable to be rejected in view of the decision of the Hon’ble Madras High Court in the case of CIT Vs. Same Deutz Fahr India Private Limited Tax case (Appeal) No.567 of 2017 order dated 5.12.2017 wherein it was held in para 17 & 18 that there is no reason why a government owned
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company cannot be treated as comparable. It was further submitted that the margin computation of this company is erroneous in as much as provision for bad and doubtful debt of Rs.34,80,000 was considered as non-operating in nature. The TPO is directed to examine as to whether the provision in question is in relation to the business which is subject matter of comparison and if so consider the same as operating in nature. The argument with regard to functional comparability is rejected following the decision in Assessee’s own case in AY 2012-13. No other arguments were advanced in the note filed at the time of hearing before us and the arguments advanced were restricted only to the note filed before us on all the grounds of appeal.
As far as comparable company, Elico Limited chosen as comparable company by the TPO, the argument with regard to functional comparability is rejected following the decision in Assessee’s own case in AY 2012-13. The further argument of the learned counsel for the Assessee before us was that segmental details of the trading and manufacturing activity of this company is not available. After hearing the rival submissions of the parties, we are of the view that it would be just and appropriate to direct the AO/TPO to call for the details with regard to segmental revenue of this company in exercise of the AO/TPO’s powers u/s.133(6) of the Act from the said company and if allocation of expenses that are common is possible then consider the segmental margin of the manufacturing segment after such allocation. The AO/TPO will confront the Assessee with the material that is gathered by them and after affording the Assessee opportunity of being heard, determine whether this company can be regarded as comparable because of availability of segmental margin of manufacturing segment and if yes, then determine the correct OP/OC after allocation of expenses to the relevant segment.
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As far as comparable company chosen by the TPO, Medical Devices Private Limited is concerned, the argument with regard to functional comparability is rejected following the decision in Assessee’s own case in AY 2012-13. The learned counsel for the Assessee submitted that this company does both trading and manufacturing and the TPO has not considered the OP/OC of the manufacturing segment for the purpose of comparison. It was also highlighted that the revenue from manufacturing is not more than 75% of the total revenue and this was a filter for inclusion of companies chosen by the TPO. After hearing the rival submissions of the parties, we are of the view that it would be just and appropriate to direct the AO/TPO to call for the details with regard to segmental revenue of this company in exercise of the AO/TPO’s powers u/s.133(6) of the Act from the said company and find out whether segmental information is possible and further examine if more than 75% of the revenue of this company is from manufacturing. The AO/TPO will confront the Assessee with the material that is gathered by them and after affording the Assessee opportunity of being heard, determine whether this company can be regarded as comparable.
Ground Nos. 5 & 6 are decided accordingly.
Ground 7: The learned CIT(A) has erred, in law and in facts, by treating foreign exchange fluctuation as operating in nature for the Appellant as well as the comparable companies. 21. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee’s own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee’s own case ruled on similar issue with the following observations:
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“20. On ground No.6, though the ld. counsel for the assessee submitted that the learned CIT(A) has erred, in law and in facts, by considering foreign exchange fluctuation as operating in nature while computing the operating margin of the Assessee and the comparable companies, the limited prayer made at the conclusion on this issue was restricted to a direction to the TPO to apply the principle of treating foreign exchange fluctuation as operating in nature under both situations, when there is a loss as well as when there is a gain. The next prayer was to apply the same principle to determine the profit margins of the assessee and the comparable companies. The limited prayer so made is in accordance with the settled legal position in this regard and the TPO is directed to compute the profit margins of assessee and the comparable companies as prayed for by the ld. counsel for the assessee. Ground No.6 is decided accordingly.” 22. The TPO is directed to follow the directions as given above in the order for AY 2012-13 in the present AY also.
Ground No.8 was not pressed and hence dismissed as not pressed. Ground No.9: The learned CIT(A) has erred, in law and in facts, by upholding the action of the AO/TPO in rejecting capacity adjustment to account for differences in capacity utilization of the Appellant vis-à-vis the comparable 23. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee’s own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee’s own case ruled regarding on similar issue with the following observations:
“21. The assessee in its TP documentation as well as before the TPO and the CIT(A), highlighted the fact that there are significant differences in the capacity utilization between the assessee vis-à-vis the comparables. It was also brought to the notice of the TPO and the CIT(A) that the assessee was incorporated in FY 2008-09 and FY 2011-12 (i.e., FY relevant to the impugned AY) was just the third year of commercial operation of the assessee during which the installed capacity was under-utlized to a significant extent. The
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assessee pleaded before the TPO and CIT(A) to provide an adjustment for idle capacity. However, the TPO/CIT(A) did not allow any adjustment to account for the differences in the capacity utilization by the assessee vis-à-vis the comparables while computing profit margin of assessee as well as the comparable companies. 22. We have heard the submissions of the assessee and the ld. DR on the issue raised by the assessee in ground No.7. We shall first see the statutory provisions relevant to the issue. Rule 10B(1)(e) of the Rules states that adjustments should be made to account for: "...the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market" 23. Rule 10B(2) of the Rules provides comparability of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. One such factor is conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 22. Rule 10B(3) of the Rules provide that: "An uncontrolled transaction shall be comparable to an international transaction if — (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 23. As per Section 92C of the Act, ALP is required to be computed using any of the given six methods and in the manner as is prescribed in Rule 10B of the Rules. Rule 10B in turn states that the most appropriate method would be one which inter alia provides
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the most reliable measure of ALP, and one of the important factors to be taken into account herein is the ability to make reliable and accurate adjustments. 24. The OECD Guidelines on this aspect is as follows:- Para 1.35 of the OECD Guidelines states as follows: "Where there are differences between the situations being compared that could materially affect the comparison, comparability adjustments must be made, where possible, to improve the reliability of the comparison. Therefore, in no event can unadjusted industry average returns themselves establish arm's length conditions" Para 1.36 of the OECD Guidelines states as follows: "…. material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties." Further, Para 2.74 of the OECD Guidelines while laying down the comparability criteria to be adopted while applying the transaction net margin method states as follows: "….. Thus where the differences in the characteristics of the enterprises being compared have a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. The extent and
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reliability of those adjustments will affect the relative reliability of the analysis under the transactional net margin method' (Emphasis supplied)
US transfer pricing Regulations on this aspect is as follows:- In addition, the US transfer pricing regulations, u/s 482 of the Internal Revenue Code (hereinafter referred to as 'the US regulations') also support the above. Regulation 1.482-1(d)(2) of the US regulation states as follows: "In order to be considered comparable to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it provides a reliable measure of an arm's length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results. For purposes of this section, a material difference is one that would materially affect the measure of an arm's length result under the method being applied." 26. The Indian transfer pricing regulations, OECD Guidelines and the US transfer pricing regulations call for an adjustment to be made in case of material differences in the transactions or the enterprises being compared so as to arrive at a more reliable arm's length price/ margin. While the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. In the following decisions it has been held that adjustment to the profit margins have to be made on account of underutilization of capacity:
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(i) In the case of M/s. Mando India Steering Systems Private Limited vs Assistant Commissioner of Income Tax, [I.T.A. No. 2092/Mds 12012], the Tribunal upheld the contention of the taxpayer for making a suitable adjustment on account of idle capacity for the purpose of margin computation. The relevant extract is reproduced as below: "10. ………. We are of the considered view that under- utilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production." (ii) In the ruling of DCIT Vs Panasonic AVC Networks India Co Ltd (I.T.A. No.: 4620/De1/2011), it was held that:- "5. ….. Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment." (iii) In the case of Biesse Manufacturing Company Limited (IT(TP) A Nos. 97 & 493/Bang/2015) for AY 2010-11, the Tribunal held as follows: "10.4.1. We have heard the rival contentions and perused and carefully considered the submissions made and material on record; including the judicial pronouncements cited. The issue for consideration is whether adjustment for under-utilisation of capacity is allowable in the case on hand and if so, the manner of computation thereof and the quantum of adjustment...... ………………
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10.4.5 In the above cited case of the Mumbai Tribunal i.e. Petro Araldite P. Ltd. (supra), the Tribunal has upheld the principle that adjustment for capacity underutilisation can be granted ………….. Following the decision of the ITAT, Mumbai in the case of Petro Araldite P. Ltd. (supra), we hold that any adjustment for capacity underutilisation can be granted....." (iv) In the recent case of GE Intelligent Platform Private Limited (IT(TP)A No. 148/Bang/2015 and 164/Bang/2015) for AY 2010-11 was held as follows: "8 ………. now the law is quite settled to the extent that once there is unutilized capacity or men power, such underutilization impacts margin and therefore, the adjustment should be made while computing the ALP …………… If the underutilization is more than average underutilization of the industry then necessary adjustment is required to be made to the margin of computing ALP......" 27. Moreover, the above argument of the assessee for grant of capacity utilization adjustment is also supported by the following decision of Bangalore ITAT in the case of Genisys Integrating Systems (India) Pvt. Ltd (ITA No.1231/Bang/2010). Relevant extract of the decision is under:- "15.2 We agree with this contention of the counsel for the assessee. All the comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure. The AO shall consider this fact also while determining the ALP and make the TP adjustments. With these directions, the appeal of the assessee is disposed of.” 28. The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable
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based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). 29. In such a scenario, one has to resort to the provisions of Rule 10B(3)(ii) which provides for making “reasonably accurate adjustments” for eliminating any material differences between the two transactions being compared. The purpose or intent of the comparability analysis is to examine as to whether or not, the values stated for the international transactions are at ALP i.e., whether the price charges is comparable to the price charges under an uncontrolled transaction of similar nature. The regulations don’t restrict or provide that the adjustments cannot be made on the results of the tested party. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per sub- clause (i) of rule 10B(1)(e) of the Rules itself. The absence of specific provision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin of tested party. The above view has also been upheld in the following decisions:- • Capegemini India Pvt. Ltd. (ITA No.7861/Mum/2011) • Demang Cranes & Components (India) Pvt Ltd. [49 SOT 610 (Pune)] 30. As far as data of comparable companies on capacity utilization being not available in public domain is concerned, it is practically not possible to obtain data on capacity utilization of comparable companies and consequently compute adjustment on the comparable companies, the operating cost of the tested party is adjusted for capacity utilization adjustment. 31. The assessee has under-utilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same. Therefore, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the same from the comparable companies by exercising his powers
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under section 133(6) of the Act. The relevant extracts of the section are as under:- "(6) require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act :" 32. In this regard, we find that the Mumbai ITAT in case of M/s Kiara Jewellery P.Ltd. (I.T.A.No.8109/Mum/2011), has directed the AO/ TPO to obtain the exact details of capacity utilization of comparable companies, if not available in public domain. The relevant extract of the aforesaid decision is as under:- "11. Keeping in view the decision of the Tribunal in the case of Petro Araldite (P) Ltd (supra) laying down the guidelines on the issue of capacity utilization, we consider it appropriate to restore this issue relating to adjustment on account of capacity utilization in the case of assessee company to the file of AO/TPO for deciding the same afresh keeping in view the said guidelines. If the exact details of capacity utilization of the comparable companies are not available in the public domain, the AO/TPO is directed to obtain the same directly from the concerned parties and to decide this issue afresh after giving assessee an opportunity of being heard." (Emphasis Supplied) 33. Accordingly, we direct the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of the comparable companies such as — • Installed Capacity, • Actual Production in Units, • Break-up of Fixed Cost and Variable Cost;
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• Segmental/ product wise information, if any. 34. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized. Ground No.7 is decided accordingly.” 24. The TPO is directed to follow the directions as given above in the order for AY 2012-13 in the present AY also.
Ground 10: The learned CIT(A) has erred, in law and in facts, by upholding the action of the AO/TPO in not allowing suitable adjustment to account for the differences in the working capital position of the Appellant vis-à-vis the comparable companies.” 25. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee’s own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee’s own case ruled on similar issue with the following observations:
"37. The assessee used the TNMM in determining the ALP for the international transaction entered into during the FY 2011-12. The provisions of Rule 10B of the Rules prescribes the methods to be used and the manner in which it is to be used in determining the ALP relating to any international transaction. The Rules i.e., Rule 10B(1)(e)(iii), provide that a transaction can be considered as comparable, if reasonably accurate adjustments can be made to eliminate differences that are likely to materially affect the price or cost or profit between a controlled and an uncontrolled transaction. 38. According to the assessee, there were significant differences in working capital between the tested party, i.e. the assessee and the comparable companies, an appropriate adjustment may be required for such difference in determining the arm's length price in view of the-following:- • The extent to which companies extend and receive credit in the form of accounts payable and receivable affects their sales and cost of sales. Sellers extend credit to purchasers in the form of
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an accounts receivable balance. Sellers, therefore, perform two functions i.e. they sell a product/service and extend credit. • The selling price incorporates two elements: the price of the product and the time value of money lent. If a company were to require all sales on a cash basis, it would be willing to accept a slightly lower price for its products than if the company were to allow its customers to pay at a later date. • The cost of goods/service sold/rendered reflects not only the purchase price of goods but also the time value for the loan from their suppliers. Difference in the terms of sale and purchase can affect comparisons. 39. The assessee placed reliance on the following decisions in support of its contention that a working capital adjustment is warranted:- (i) In the case of Demag Cranes & Components (India) Pvt. Limited (ITA No.120/PN/2011), the Pune Tribunal held as follows:- "In our opinion, it is the duty of the TPO to apply the provisions of rule 10B(1)(e) to establish the ALP in relation to international transaction as per the TNMM, which is an undisputed method found applicable to the present case by both the parties. It is a settled accounting principle that the net margins can be influenced by some of the same factors which can influence price or gross margins. Further, it is the requirement of the rules / provisions that any difference which is likely to materially affect the NPM in open market has to be eliminated. TPO must know that the TNMM visualizes the undertaking of the thorough comparability analysis and elimination of the differences through the requisite adjustments …………….. Therefore, we dismiss the revenue's contention that no further adjustment if any is entertained once the comparables are supplied by the assessee and when they are accepted by the TPO. Thus, working capital is a factor which influence the price in the open market and therefore the net profit margin of the business segment of the assessee which is targeted by the TPO/AO/DRP. Hence, in principle,
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we hold that the TPO/AO/DRP has failed to entertain the objections of the assessee on the 'working capital' adjustments issue. Therefore, we direct them to allow the requisite adjustment on account of the impugned 'working capital' while determining the Arm's Length operating Margin of the Comparables." (emphasis supplied) (ii) In the case of Capgemini India Private Limited Vs Asstt. Commissioner of Income Tax (ITA No.7861/Mum/2011), the Mumbai Tribunal held as follows:- “... In our view, working capital adjustments are required to be made because these do impact the profitability of the company. Rule 108(2)(d) also provides that the comparability has to be judged with respect to various factors including the market conditions, geographical conditions, cost of labour and capital in the market. Accounts receivable/payable effect the cost of working capital. A company which has a substantial amount blocked with the debtors for a long period cannot be fully comparable to the case which is able to recover debt promptly..." "... In our view, working capital adjustment will improve the comparability. We, therefore, direct the AO/TPO to make the working capital adjustment after necessary examination in the light of the observations made above and after allowing opportunity of hearing to the assessee." (emphasis supplied) (iii) In the case of Mentor Graphics Pvt. Ltd v DCIT [(2007) 109 ITD 101 (Delhi)], the Delhi ITAT held as follows:- "Depending on facts of the case, final set of comparables may need to eliminate differences by making adjustments for the following: a) working capital b) adjustment for risk and growth
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c) adjustment of R&D expenses" The position in India as per Indian regulations on the subject has been noted earlier. If there are differences which can be adjusted, then adjustments are required to be made. If the difference between the companies are so material that adjustment is not possible, then comparables are required to be rejected." (Emphasis supplied) 40. In light of the principles embodied in the above judgement, the assessee prayed that the benefit of a working capital adjustment should be accorded to the assessee in the instant case. 41. The CIT(A) rejected the claim of the assessee for the reason the assessee has to demonstrate the impact on profit margins by reason of a particular level of working capital requirement in the case of the assessee and that of comparable companies. In coming to the above conclusion, the CIT(A) has placed reliance on decisions of Chennai ITAT in the case of Mobis India, ITA No.2112/Mds/2011 (AY 2007-08) and SAM Deutz Fahr India Pvt. Ltd., ITA No.2666/Mds/2016 AY 2006-07, order dated 22.2.2017. In those cases, the Tribunal was dealing with cases where data was not provided. In the present case the assessee has given such working which is given as Annex. 4 to the written submissions filed before us. Such working was also given in pages 59 to 64 of submissions filed before the CIT(A). Therefore, the TPO/AO is directed to consider the claim of the assessee and allow adjustment to profit margins towards working capital adjustment in accordance with the law, after affording assessee the opportunity of being heard. Gr.No.8 is decided accordingly. 26. The TPO is directed to follow the directions as given above in the order for AY 2012-13 in the present AY also.
Ground 11: The learned CIT(A), has erred in law and in facts, by directing the AO/ TPO to make the transfer pricing adjustment on the entire manufacturing segment of the Appellant rather than restricting the same to the value of international transactions undertaken with Associated Enterprises only. Without prejudice, in case the adjustments made to international transactions are held to be valid,
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then the same deserves to be restricted in proportion to international transactions in the interest of justice. 27. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee’s own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee’s own case ruled on similar issue with the following observations:
“42. The manufacturing segment of assessee sells products manufactured from both AEs and third parties. Similarly assessee purchases raw materials and components that are used for manufacture of finished goods from both AEs and third parties. has purchases from both AEs and third parties. 43. The details of AE sales to total sales and AE purchases to total purchases in respect of manufacturing activity of the assessee is as provided below:- Ratio of AE sales to total sales
Particulars Amount (INR) AE Sales (A) 13,93,39,733 Total Sales (B) 39,19,74,335 Ratio (C =A/B) 35.55%
Ratio of AE purchases to total purchases
Particulars Amount (INR) Raw material purchases from AE (D) 4,95,41,241 Total raw material purchases (E) 22,64,22,647 Ratio (F =D/E) 21.88% 44. Section 92(1) of the Act provides as under:- "Any income arising from an international transaction shall be computed having regard to the arm's length price".
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Section 92B defines the term "international transaction" to mean "a transaction between two or more associated enterprises …..” . 46. A conjoint reading of section 92 with section 92B clearly brings out that computation of income at ALP is permissible only in respect of international transaction, which, in turn, means a transaction between two or more associated enterprises. Similar position has been reiterated in the machinery provision contained in section 92C dealing with the manner of computation of ALP. Sub- section (1) of section 92C stipulates that:- "The arm's length price in relation to an international transaction shall be determined by any of the following methods....." 47. It is the plea of the assessee that addition by way of transfer pricing adjustment is mandated only in respect of transactions between two or more AEs. The profit from comparable transactions of the assessee with non-AEs is one of the subtle and most reliable modes for determining ALP of the international transactions. The Act does not contemplate an addition by way of TP adjustment in respect of transaction with non-AEs. 48. The TPO determined addition to total income, consequent to determination of ALP only in relation to international transaction i.e., transactions with AE in the export of finished goods segment by considering the value of international transaction at Rs.3,31,50,982 which is the value of export of finished goods by the assessee to its AE and not on the total sales in the finished goods segment of Rs.39,19,74,355 (vide para 8.3 of the TPO’s order). 49. The Hon'ble Bombay High Court in the case of Phoenix Mecano (India) Private Limited [ITA No. 1182 of 2014], had to deal with the following question of law suggested by the revenue:- 6.1 Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was correct in directing the AO to restrict the determination of the ALP to transactions with the AE rather than on the entire turnover of the Company. 6.2 Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct while
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issuing the above directions without appreciating the observations of the DRP that there was no segmental audit of the transactions of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by only restricting to transactions with AE." 50. The Hon’ble Bombay High Court on the above questions of law held as follows:- “5. With the assistance of the learned counsel for respective parties, we have considered the submissions and the judgment of the Tribunal. The Tribunal in para 7 of its order has observed as under:- "7. We have heard both the parties and their contention have carefully been considered. So far it relates to grievance of the assessee that the TP adjustment can only be applied to international transactions of the assessee with the AE and it cannot be applied at entity level, the issue is found to be covered by the aforementioned decision of the Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. (supra). Therefore, we hold that determination of arms length price should be restricted only to international transaction of the assessee with its AE. It was pointed out that the figures are available with the AO, details of which has also been filed before us at page 170 of the paperbook. Therefore, we direct the AO to take only the international transactions of the assessee with its AE for the purpose of determining arms length price. We direct accordingly." 6. The Tribunal has held that the figures are available with the Assessing Officer, the details of which has also been filed with the Tribunal at page 170 of the paperbook. It would be clear that the details of the international transaction are specifically made available and therefore the apprehension of the department as such is misplaced.
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…….. 7. Considering the provisions of Section 92 of the Income Tax Act, so also the reasoning adopted by the Tribunal suggesting that separate figures of international transaction are available, so also the order referred above. No substantial question of law arises for consideration. As such the appeal is dismissed with no costs." (Emphasis supplied) 51. The Hon'ble Mumbai Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 7032/Mum/2011] held that the ALP can only be determined on the value of international transaction alone and not on the entire turnover of the assessee at entity level. This decision was further upheld by the Hon'ble Bombay High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 2201 of 2013], which held as below:- "2. .............. (a) Whether on facts and the circumstances of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs.)? 3. ........... ……….. (e) We find that in terms of Chapter X of the Act, re- determination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent
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third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered to with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act. 5. In the above view, as the provisions of the Act in respect of transfer pricing are self evidence, Question No.(a) as proposed does not give rise to any substantial question of law. Thus not entertained.” 52. The ITAT Bangalore in the case of Kirloskar Toyota Textile Machinery Pvt. Ltd. v. ACIT [IT(TP)A No.1401/Bang/2010 held as under:- “Taking into consideration of these factors, we accept the first fold of submission made by the learned counsel for the assessee and direct the Assessing Officer to confine the adjustment, qua the purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE ….. (emphasis supplied) 53. The CIT(A) in exercise of his powers of enhancement of income took the view that the ALP has to be determined on the basis of the entire sales in the finished goods segment including transactions with Non-AE also. The reasoning adopted by the CIT(A) for doing so was as follows:- “10.0 While examining the working of ALP in the case of appellant, it was observed that the TPO has reduced the adjustment proportionately by holding that only 8.46% of revenue of the appellant is from AE. She accordingly adopted 8.46% of the operating revenue and 8.46% of the Operating cost for purpose of the determination of ALP. However, this method is not the correct approach as the ALP determination should have been based on the entire operating revenue and entire operating cost. Since this change in method would have amounted to enhancement of the income of the appellant, so opportunity of being heard was given to the appellant vide order sheet entry dated
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11.08.2017, as to why the proportionate reduction done by the TPO should not be disregarded. The appellant sought time to file written submissions and the same was allowed. The appellant filed written submissions vide letter dt 29.08.2017. The same have duly been considered and the issue is being decided as follows: 10.1 In the case under consideration, the appellant is selling its product to AE as well as to non AEs, for the manufacture of which, part purchases are from AEs and remaining from the non AEs. The TPO has considered OP/OR for purpose of computation of the ALP as the quantum of sales to AE are lesser than the purchase from AE and thus lesser controlled. When a product is sold, only overall profit margin is recorded without any data as to what would be the profit in relation to purchases from AE. So this cannot be presumed that the profit percentage earned in relation to costs related to AE transactions as well as non- AE transactions was same. Since costs are common to the products ultimately sold by the appellant, and the same includes AE transactions, so it is always possible that the margin of profit percentage vis-a-vis costs related to AE transaction is not the same as profit margin on costs related to non-AE transactions but ultimately overall certain profits are being shown. Further, the transactions with non-AEs can be presumed to be at arm's length as there is no reason to earn lesser profit. But in case of transactions with AEs, there is always a likelihood of earning lesser profits as transactions are controlled and decisions are influenced by AE. Thus the overall profits on account of transactions with AE as well as non-AE gets suppressed.” 54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non-AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals).
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We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm’s length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm’s length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 56. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee.” 28. The TPO is directed to follow the directions as given above in the order for AY 2012-13 in the present AY also. No arguments were advanced on Gr.No.12 and the same is therefore dismissed.
Ground 13: Disallowance of prior period expenses -INR 65,48,149 “a) The learned CIT(A) has erred in law and in facts, in upholding the disallowance of expenses pertaining to previous year of Rs.65,18,149 which was charged to the profit and loss account in the year under consideration and incurred for the purpose of business of the Appellant. b) Without prejudice to the above, the learned CIT(A) has erred in law and in facts, not granting allowance of the prior period expenses in the previous year on account of being incurred wholly and exclusively for the purpose of business of the appellant.
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c) Without prejudice to the above, the learned CIT(A) ought to have set off the prior period income of Rs.47,04,916 against the prior period expenditure of Rs.65,48,1490 and thereby restricted the net disallowance of prior period expenditure to Rs.18,43,233”. 29. At the time of hearing it was agreed by the parties that that on identical issue of inclusion of exclusion of comparable companies, this Tribunal in Assessee’s own case in IT(TP)A.No.2192/Bang/2017 for AY 2012-13 order dated 17.9.2018 in Assessee’s own case ruled that the expenses should be allowed on the basis of crystilization. The AO is directed to follow the aforesaid direction contained in paragraph 58 & 59 of the aforesaid order on this issue, which reads as follows:
“58. It is not in dispute that in AY 2013-14, the Assessee has claimed the same expenses as deduction but the same was disallowed by the AO on the ground that it was expenditure relating to AY 2012-13 and therefore cannot be allowed as deduction in AY 2013-14 as it was prior period expenditure. The additional ground is admitted for adjudication as the claim could not be made by the Assessee in the assessment and appellate proceedings for AY 2012-13 as it was under the bonafide belief that the deduction would be allowed in AY 2013-14. 59. As far as the merits of the additional ground is concerned, we are of the view that the deduction under mercantile system of accounting has to be based on crystallization of liability. If the liability in question is established to have crystallized in AY 2012- 13, then the Assessee should be allowed the deduction. We hold and direct accordingly.”
Ground No.14: Disallowance of provision for various expenses by treating as provision for contingent liability – INR 1,00,62,131 a) The learned CIT(A), has erred in facts and law, in not allowing deduction in respect of inadvertent and suo-moto disallowance
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made by the Appellant of the provision for expenses under Section 40(a)(ia) and Section 40(a)(i) on account of not withholding of taxes. b) The learned CIT(A) has erred in law and in facts, in disallowing the provision for various expenses under Section 37 of the Act by treating the same as unascertained/contingent liability in nature. c) The learned CIT(A) ought to have appreciated that the Appellant is following mercantile system of accounting and accordingly provisions are created in respect of the liabilities actually incurred/crystalized during the year but the invoices have not yet been received from Vendors by the end of the year. d) The CIT(A) ought to have appreciated that although the said provisions are reversed next year, the fact that corresponding invoices have been accounted and tax deduction is done demonstrates that the provisions are in the nature of ascertained/crystalized liabilities. e) The learned CIT(A) ought to have appreciated that Appellant has provided a one-to-one match between the amounts disallowed under Section 40(a)(ia) and the expenses recorded in subsequent year upon actual receipt of invoice. 30. On the aforesaid ground of appeal, the limited submission that was made on behalf of the Assessee was that the expenses in question were disallowed by the revenue authorities on the ground that they were not ascertained liability and were mere provision which cannot be allowed as deduction. The Assessee had made disallowance of the disputed sum for the reason that tax was not deducted at source on the provision so made in the books and in view of the provisions of Sec.40(a)(ia) of the Act for non deduction of tax at source, the expenditure cannot be allowed as deduction. The limited prayer of the learned counsel for the Assessee was that as and when TDS is paid the deduction in question has to be allowed. We are of the view that the prayer for allowing deduction of expenses in the year in which TDS is paid to the Government is acceptable subject to the condition that the liability in question should be crystalized/ascertained. It is
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made clear that crystallization even if it is in earlier period should not result in disallowance u/s.40(a)(ia) of the Act and on payment of TDS the deduction should be allowed subject to such expenses being otherwise allowable. Gr.No.14 is decided accordingly.
Ground No.15 is regarding levy of interest u/s.234B of the Act, which is mandatory but the AO should give consequential relief based on the ultimate determination of total income. Gr.No.16 is regarding action of the AO in initiation of penalty proceedings under section 271(1)(c) of the Act. No appeal lies against the initiation of penalty u/s. 271(1)(c) of the Act, hence ground No.16 is dismissed.
In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 12th day of October, 2018.
Sd/- Sd/-
( INTURI RAMA RAO ) ( N.V. VASUDEVAN) Accountant Member Judicial Member
Bangalore, Dated, the 12th October, 2018. / Desai Smurthy /
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order
Assistant Registrar ITAT, Bangalore.