IMSOFER MANUFACTURING INDIA PVT. LTD.,PUNE vs. ACIT, CIRCLE-12(1), NEW DELHI

2.2 following inconsistent approach while selecting the comparable during the current year vis-a-vis previous assessment year and rejecting the functionally comparable companies without considering the judicial precedents submitted by the Appellant.

2.3rejecting comparable companies selected by the appellant in its TP Study on inappropriate grounds although the same are functionally comparable and also rejecting the filters applied by the Appellant and inappropriately applying fresh filters.

2.4 incorrectly rejecting the additional comparables submitted by the Appellant to benchmark the international transactions of the Appellant. 2.5 incorrectly classifying provision/liabilities no longer required amounting to INR 12,047,716/- as non-operating income and considering the impairment loss amounting to INR 198,347 as a part of operating expense, while calculating the operating margin of the Appellant without considering the commercial reasons submitted by the Appellant. 2.6 not allowing the economic adjustments as provided in Rule 10B of the Rules, to reduce the difference while comparing the Appellant, being in its initial phase of operations, with already established companies.

2.7 rejecting the use of multiple year data i.e. contemporaneous data in the transfer pricing study report maintained as per Section 92D of the Act read with I Ol) of the Rules used for determining the arm's length price of the international transaction of Appellant.

3. Transfer Pricing adjustment on the international transaction of receipt of services-On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld. TPOI AO by:

3.1 making an adjustment with regard to receipt of services transaction of the Appellant as the same cannot be benchmarked separately since it is inextricably linked with the main function i.e. manufacturing function of the Appellant.

3.2 violating the "Rule of Consistency" while making the adjustment to the receipt of service transaction, as the same was considered to be at arm's length in the TP assessment proceedings for earlier years.

3.3 not granting the benefit of +1-5 percent as per the proviso to section 92C(2) of the Act.

3.4 not providing any valid reason to reject the alternative benchmarking carried out by the Appellant wherein the Associated Enterprise CAE') is considered as tested party for arm's length price. 3.5 holding that the Appellant failed to justify the mark-up of 5% on cost with respect to the services which were actually rendered by the AEs

3.6 not considering various evidences and justifications submitted in order to justify the mark up charged on the receipt of services.

3.7 disallowing mark-up of 5% on the receipt of services transaction without identifying any comparable uncontrolled transactions and without cogent reasons and thereby disregarding Rule 10 B of the Rules.

3.8 ignoring the fact that the AE has paid tax on such services rendered to the Appellant and disallowance of such payment for the services received by the Appellant will lead into double taxation of the same amount.

4. Other Grounds 4.1 On the facts and in circumstances of the case and in law, the Ld. AO has erred and the Hon. CIT(A) has further erred in upholding/confirming the action of the Ld. TPO/AO by proposing to initiate penalty proceedings under section 271 (1)( c) of the Act without considering the facts of the case and legal provisions of the Act.

The assessee's own margin is worked out to be (3.87%). Based on the analysis, the assessee has concluded that its international transactions are at arm's length.

After considering the facts and submissions, the ld. CIT(A) directed for inclusion of Lotus Chocolate Company Limited, thereby reducing the transfer pricing adjustment to Rs. 10,96,71,595/- (Rs. 8,93,05,765/- for import of raw material and other transactions and Rs. 2,03,65,830/- for availing of consultancy services).

However, the same were available in public domain subsequently. It was further submitted that the said company was accepted by the TPO as comparable in A.Ys2017-18, 2018-19 and 2020-21.

Veeramani Biscuits Industries Limited and iii) Perfetti Van Melle India Private Limited are engaged in manufacturing and marketing of confectionery,similar to the assessee,which includes toffees and chewing gums. With respect to Perfetti Van Melle India Private Limited, we find that the AO has not contested the functional comparability with that of the assessee. With regard to the financial of Perfetti Van Melle India Private Limited, the same were not available during the time the Transfer Pricing analysis was carried out but subsequently the same became available in the public domain. We also note that the TPO himself has accepted the above three companies as comparable in subsequent years which was not disputed by the Revenue. In view of the above arguments, we are of the considered view that the three companies namely i) Priya Foods Limited, ii) Veeramani Biscuits Industries Limited and iii) Perfetti Van Melle India Private Limited be considered by the TPO in the final set of comparable companies. We accordingly set aside the issue of comparable to the file of the TPO to consider the above three companies as comparable. The grounds 2.3 and 2.4 are allowed.

19.09.2013.

The ld AR of the assessee relied on the case of Bilcare Limited [ITA No.1693/PUN/2018] and Tetra Pak India Pvt Ltd [TS-573-HC- 2023(BOM)-TP].

“8. As regard the credit to profit and loss account on account of liabilities written back amounting to Rs. 6,15,59,011/- the details of the liabilities written back were made available to CIT(A) as well as ITAT. Both, on facts, and having considered those details, have come to conclusion accepting the Assessee’s contention that those liabilities belong to earlier years and are directly relatable to the regular business operations of the assessee and since these liabilities were no longer payable to business creditors should be allowed to be written back in the AY under consideration and the same was rightly offered to tax as business income U/s. 41(1) of the Act. Therefore, on facts it was accepted that these liabilities written back were arising out of normal business operations and hence form part of operating income of the assessee.”

“7. We have carefully considered the orders of the authorities below. There is no dispute that the machinery purchased by the assessee was lying in capital work in progress. It is also not in dispute that the treatment given by the assessee is in line with the accounting standard issued by the ICAI. In our considered opinion a provision for impairment of assets is not a depreciation charge nor amortization of fixed assets but it is a provision made to the carrying amount of the fixed assets which is reversible in nature. Moreover section 92 (1) of the Act requires that any income arising from an international transaction / allowance for any expenses shall be computed having regard to arms length price. In our considered view impairment of assets cannot be related as international transaction of the assessee. Further the provision for impairment of assets is not regular business expenditure since it is not recurring in nature and is not related normal business operation and hence not in the nature of operation expenses, therefore, in our considered opinion the same cannot be treated as operating expenditure for the calculation of PLI of the assessee. We accordingly direct the AO/TPO to exclude provision of impairment of assets as operating expenditure. This ground is accordingly allowed”.

25. Ground No. 2.6 relates tonot allowing economic adjustments as provided in Rule 10B of the Income Tax Rules, 1961 being assessee’s initial year of operations.

26. At the very outset, the ld. counsel for the assessee contended that in assessee’s own case for A.Y 2009-10 and A.Y 2010-11 on similar facts and circumstances, Co-ordinate ITAT Delhi Bench directed the Assessing Officer/TPO to allow the adjustment for import duty.The TPO had held that import duty adjustment cannot be given to the assessee as there is no reliable accurate data for all the comparable companies. The CIT(A) came to the conclusion that reliable data was not provided by the assessee and therefore, no comparability adjustment can be allowed.

“24. The next issue relates to the adjustment on account of custom duty.

27. The DR strongly supporting the findings of the CIT(A) stated that no reliable datas are available.

of the comparable companies is only 0.56% as can be seen from the following chart :- XXXXX

3.8.3 We have considered the rival submissions and perused the order passed by the authorities below. The Ld. DRP has rejected this contention of the assessee company on the ground that custom duty does not have any impact on the net profit level of the assessee. While deciding the issue of the capacity adjustment, we have held that in terms of Rule 10B (3) all the adjustments which are materially affecting the transaction being compared need to be eliminated. Thus, in case non-cenvat-able custom duty on import made by the assessee company is materially affecting the transaction vis-à-vis the comparables being considered by the TPO then the same needs to be eliminated. Since, this issue has not been considered by the TPO and considering the fact that we have remitted the matter back to AO for allowing adjustment on account of capacity utilization, we deem it fit to restore this issue also to the TPO. The TPO will examine whether non-cenvat-able custom duty on imports paid by the assessee is materially affecting the PLI of the assessee company and if he finds that this payment of non-cenvat-able custom duty is materially affecting the transaction with that of Assessment year 2011-12 the comparables then he will suitably make adjustment thereof.”

30. Considering the factual matrix as discussed here in above in the light of the decision of the coordinate bench (supra) we direct the AO/TPO to allow the adjustment of custom duty.

28. Respectfully following the judicial pronouncements and decision of the co-ordinate bench in assessee’s own case, we direct the Assessing Officer/TPO to allow the adjustment of custom duty. Ground No. 2.6 is allowed.

29. With respect to the issue of capacity adjustment, the ld AR submitted that the TPO and the CIT(A) held that reliable data is not provided by the Assessee and therefore no comparability adjustment can be allowed. It is further stated that in Appellant's own case for AY 2009-10 and AY 2010-11 (with similar fact pattern), Hon'ble Delhi ITAT directed the AO/TPO to allow the capacity adjustment (Imsofer Manufacturing India Pvt. Ltd vs DCIT (ITA No.5158/DEL/2015 & order). It is further stated that the data for computing capacity adjustment is available in the annual reports of the comparable companies.

31. The next issue relates the adjustment on account of capacity utilisation. Before us the counsel for the assessee vehemently stated that since this year is the first full year of operations hence, the assessee could not utilise its installment capacity to the fullest and could utilise only 45.34% of it capacity in relation the production of finished goods whereas the average capacity utilisation of the comparables is 71%. It is the say of the counsel that the CIT(A) disregarded this adjustment on the basis that there was practical difficulty in finding out the relevant data for carrying out the capacity adjustment of the comparables. The counsel prayed for the allowance for adjustment of capacity utilisation.

32. The DR strongly supporting the findings of the CIT(A).

34. In our considered opinion the financial report of every company contains the details relating to the capacity utilisation and the same are available in the public domain also. The financial reports of the comparable 14 companies used by the TPO do contain the capacity utilisation details and the same can be used for giving the benefit of under utilisation of capacity by the appellant company. We accordingly direct the AO /TPO to allow adjustment of capacity utilisationby comparing the data of the comparable companies in so far as capacity utilisation is concerned with that of the assessee. In alternate the assessee shall furnish the relevant data and the AO / TPO shall examine the same after giving a reasonable opportunity of being heard to the assessee.”

33. The ground no. 3.1 to 3.8 relates to disregarding the aggregation approach for receipt of services with the manufacturing function and disallowing the mark up on receipt of services. The ld AR of the Appellant submits that receipt of services has been accepted by the TPO and the CIT(A) and thus the markup charged on receipt of services should not be disallowed. The ld AR argued that further, no third party would render these services on cost tocost basis in third party scenario. Accordingly, the ld AR submits that the markup of 5% is reasonable for receipt of services and should be allowed. The ld AR relied on the judicial precedent wherein it was held that disallowance of markup cannot be upheld while rendition of services has been accepted:

Humboldt Wedag India Pvt. Ltd. (TS-68-ITAT-2023(DEL)-TP) BMW India Financial Services Pvt Ltd (TS-68-ITAT-2023(DEL)-TP) Corning Technologies India Pvt Ltd (TS-427-ITAT-2021(DEL)-TP)

“Ground No. 1.1 to 1.5 pertaining to transfer pricing adjustment of Rs. 1,56,78,332

7.1 Our attention was drawn to the order of the Hon’ble Tribunal for the assessment years 2014-15 and 2016-17 in assessee’s own case wherein similar issue arose for consideration and the Hon’ble Tribunal keeping in view the entire facts and circumstances of the case deleted the entire adjustment made on this account by allowing the mark-up charged by the AEs in the services provided to the assessee. The relevant extract of the order of the Hon’ble Tribunal for the assessment years 2014-15 and 2016- 17 in and respectively dated 18.08.2021 is reproduced below:- “4. The assessee paid Rs.8.28 lacs for supervising charges, and Rs.14.25 Crores for central services. On supervision services, the AE charged a net profit mark-up of 4% on the internal cost incurred on the basis of number of hours spent by its personal in providing such services. On the central services, the AE charged 5% profit mark-up on internal cost while third party costs are charged on cost to cost basis.

5. The mark-up of 4% and 5% has been disallowed by the TPO and accordingly enhanced the income of the assessee based on the id. DRP observations for the year 2010-11. For the sake of ready reference, the same is reproduced as under:

"3.3.2. In the assessee's case, the intra- group services relate to general administration, finance and accounting, coordination, general management, corporate and project financing, recruitment and education. It is noted that the assessee is an entrepreneur in its own right and is engaged in engineering, procurement and commissioning projects for the third party clients. It procured orders on independent basis and also carried out the project on its own. It is hardly operating as an extension of AE or catering exclusively to the AE. It virtually undertakes all the risks associated with rendering services, marketing and performs various complex roles. Therefore, the ratio of Supreme Court decision in the case of Morgan and Stanley & Co. hardly applies on the facts of the assessee's case. The assessee has also provided substantial evidence in form of e-mails and correspondence with the AE in respect of the services rendered by the AE. On going through the same, it clearly comes out that the AE was rendering services which were beneficial for the assessee in conducting its business. No doubt, some benefit of the services may have accrued to overall group also. But the primary beneficiary was definitely the assessee. Under these circumstances, it would not be proper to term the services rendered by the AE as stewardship activity.

3.3.3. Corning to the quantum of payment for the services, it is seen that from the total cost of services, cost of stewardship activity services/duplicate services is first removed. The remaining cost is allocated to different organizations of the group. The assessee pays the cost of services allocated to it plus ore-agreed mark up. In the course of hearing, the assessee was asked to justify the mark up. However, no detailed justification was provided in this regard. It was only stated that since the AE was providing the services, it was entitled to earn some margin on the same. However, as discussed earlier, while the primary beneficiary of the services is the assessed, there are also some incidental benefits accruing to the group. The parent company gets benefited by better synergies, scale of economy, better coordination and reporting. Considering this, the AE, in our opinion, was not justified in charging any mark up on the cost of services. The arm's length price of the services is therefore decided at the actual cost. The adjustment is therefore sustained to the extent of mark up only. The TPO is directed to reduce the adjustment accordingly."

6. The main argument of the Id. AR was that these transactions are benchmarked by using TNMM and furnished that TP documentation whereas the TPO did not follow any prescribed method and the entire mark-up is disallowed without giving any reasons. The observation of the revenue that the parent company gets benefited by better synergies, scale of economy, better coordination and reporting cannot be accepted.

7. While the assessee avails supervision services from its AEs and pays mark-up charges, it also provides such services to the AEs for their third party contracts and receives mark-up charges. The pricing basis and the results arising from the same have been accepted by the TPO. Disallowing the markup on receipt of services while in-principle accepting the provision of similar services rendered having similar intent and basis of pricing cannot be valid ground to disallow the mark- up. It is not out of contest to note that no such disallowance has been made on the mark-up in the case of the assessee AY 2007-08 to 2012-13 and AY 2015-16.

8. Hence, keeping in view, the entire facts and circumstances, the contention of the revenue that the AE invariably derives some benefit and hence no mark-up should be charged, cannot be accepted.”

7.2 Keeping in view the rule of consistency and more so the position that the facts for the assessment year 2017-18 remain the same as that of assessment year 2014-15 and 2017 in respect of the impugned transactions with its AE, we respectfully following the order of the Hon’ble Tribunal (supra) direct the Ld. AO to delete the addition of Rs.1,56,78,332/-. Ground No. 1.1 to 1.5 pertaining to the adjustment of Rs. 1,56,78,332 to the total income of the assessee on account of difference in ALP of its international transactions with its AEs relating to availment of supervision services, SAP services and Central services are thus allowed.”

”Hence, in view of the observations above, it cannot be said that the software/IT support services cannot be charged at par. A markup of 5% policy for the IT services rendered is an acceptable markup by international guidelines and as per EU Joint Transfer Pricing Forum. It cannot be expected that the parent organization supply support services without charging anything for such services rendered. Hence , we hold that the markup o f 5% is sufficient to recoup the expenditure involved by the AE in exploration, inspection, testing and finalization of & 562/Del/2022 BMW India Financial Services Pvt. Ltd. 12 the suitable software . Accordingly, we direct that no other expenses other than 5% markup be allowed on the support services rendered by the AE.”

The order is pronounced in the open court on 14.11.2024.