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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI S.K.YADAV & SHRI A. K. GARODIA
O R D E R PER A. K. GARODIA, A. M.: This is an assessee’s appeal directed against the assessment order dated 23.09.2011 for A. Y. 2006 – 07 passed u/s 143 (3) r.w.s. 144C as per the directions of DRP.
The Grounds raised by the assessee are as under:-
“The grounds mentioned herein below are without prejudice to one another. 1.1 That the order of the learned Assessing Officer ('Ld. AO'), pursuant to the directions given by the Hon'ble Dispute Resolution Panel ('DRP'), to the extent prejudicial to the Appellant is perverse, erroneous on facts and bad in law and has been passed in violation of the principles of natural justice. 1.2 The Ld. AO/ DRP erred in concluding that the profits derived from the sale of spare parts, components etc are in the nature of trading profits and hence not eligible for deduction under section 10B of the Income-tax Act, 1961 ('the Act'). 1.3 The Ld. AO/DRP erred in ignoring the fact that the profit from spare parts sale of Rs. 6,88,907 are generated from the manufacturing activities carried out in the undertaking of the Appellant and hence
2 IT (TP) A No.1143/B/2011 the same would constitute 'profits derived from the undertaking' eligible for tax holiday benefits under section 10B of the Act.
1.4 The Ld. AO/ DRP erred in reducing net profit from sale of spare parts from the 'profit of the undertaking' and the gross receipts from the 'export turnover' and 'total turnover' of the undertaking whilst computing the revised deduction under section 10B of the Act.
1.5 The Ld. AO/ DRP erred in ignoring the fact that profit from scrap sales of Rs. 1,70,83,875 are generated from the manufacturing activities of the undertaking and the same would constitute profits derived from the business of the undertaking eligible for tax holiday benefits under section 10B of the Act. 1.6 The Ld. AO/ DRP erred in reducing income from scrap sales from the 'total turnover' of the undertaking whilst computing deduction under section 10B of the Act.
1.7 That the Ld. AO/ DRP erred in upholding the rejection of Transfer Pricing (TP) documentation by the Ld. Transfer Pricing Officer ('Ld. TPO').
1.8 That the Ld. AO/ DRP erred in confirming the action of the Ld. TPO in ignoring the fact that since the Appellant is availing tax holiday under section 10B of the Act, there is no intention to shift the profit base out of India.
1.9 That the Ld. AO/ DRP erred both in facts and in law in making an adjustment of Rs. 359,428,519 in respect of contract manufacturing segment and Rs. 6,818,289 in respect of Engineering Design services segment of the Appellant, holding that the international transactions in these segments do not satisfy the arm's length principle envisaged under the Act and in doing so grossly erred in: 1.9.1 Upholding the rejection of comparability analysis of the Appellant in the TP documentation and confirming the comparability analysis as adopted by the Ld. TPO in the TP Order;
1.9.2 Disregarding application of prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2006-07) data for comparable companies should be used; 1.10 That the Ld. AO/ DRP, in respect of contract manufacturing segment, erred in upholding Cost Plus Method ("CPM") as the most appropriate method with selection of Gross Profit to Cost of Production as the profit Level Indicator as against Transactional Net Margin Method ('TNMM') with Operating Profit to Total Cost as the relevant Profit Level Indicator adopted by the Appellant in the TP Documentation.
3 IT (TP) A No.1143/B/2011 1.11 That the Ld. AO / the Ld. DRP erred in upholding the adjustment to the Engineering Design Services segment of the Appellant made by the Ld. TPO and in doing so grossly erred in; 1.11.1 Recharacterising the Engineering Design Services rendered by the Appellant to be Information Technology enabled Services. 1.11.2 Upholding the act of the Ld. TPO of collecting information of the companies by exercising power granted to him under section 133(6) of the Act. 1.11.3 Ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm's Length Price of the international transactions of the Appellant, but for an adjustment towards differences in the working capital position between the Appellant and the entrepreneurial comparable companies. 1.12 That the Ld. AO/ DRP erred in law and facts in computing the arm's length price without giving benefit of lower range of +/- 5 percent under the proviso to Section 92C(2) of the Act. 1.13 The Ld. AO/ DRP has erred in consequently levying interest under section 234B of the Act to the extent of Rs. 6,95,09,039. 1.14 The Ld. AO/DRP erred in consequently levying interest under section 234D of the Act to the extent of Rs. 1,17,981. All the aforesaid grounds are without prejudice to one another. The Appellant craves leave to alter, amend, modify, amplify or withdraw any or all the above grounds of objection, or add any further grounds, before or at the time of hearing.”
The assessee has also raised 3 additional grounds. Learned AR of the assessee submitted that the additional grounds and Ground No. 1.1 & 1.2 and 1.7 to 1.9 are general and therefore, no separate adjudication is called for in respect of these grounds. Thereafter, she submitted that in Ground No. 1.3 & 1.4 is the issue about allowability of deduction u/s 10B in respect of Sale of Spare parts and in Ground No. 1.5 & 1.6 is the issue about allowability of deduction u/s 10B in respect of Sale of Scrap. She submitted that both these issues are covered by the tribunal order in assessee’s own case for A. Y. 2006 – 07 in IT (TP) A No. 1222/B/2010 dated 04.11.2016 copy on pages 1537 to 1546 of the paper book. She pointed out that the issue about sale of spare parts is covered against the assessee as per Para 7 of this tribunal order and the second issue about sale of scrap is covered in favour of the assessee as per Para 8 of this tribunal order. Learned DR of the revenue supported the orders of the authorities below.
4 IT (TP) A No.1143/B/2011
We have considered the rival submissions and we respectfully follow this earlier tribunal order and reject Ground No. 1.3 & 1.4 and allow Ground No. 1.5 & 1.6 because we find no reason to take a contrary view in the present year.
Regarding the TP issue raised as per the remaining grounds, she submitted that as per Para 9 of the same tribunal order, it was held that TNMM should be adopted as MAM and the matter was restored to AO/TPO for working out ALP by adopting TNMM as MAM. Learned DR of the revenue supported the orders of the authorities below.
We have considered the rival submissions and we respectfully follow this earlier tribunal order and we find no reason to take a contrary view in the present year. Therefore, we restore TP matter back to AO/TPO for working out ALP by adopting TNMM as MAM after providing adequate opportunity of being heard to the assessee.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on the date mentioned on the caption page.