JASO INDIA PRIVATE LIMITED,KOLKATA vs. DCIT, CIRCLE-11(1), KOLKATA, KOLKATA

Per J. Sudhakar Reddy, AM :- This is an appeal filed by the assessee directed against the order of the Ld. Assessing Officer, passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter the ‘Act’), relating to Assessment Year 2012-13. 2. Facts in brief:- JASO India is a private limited company incorporate under the Companies Act, 1956. It is principal shareholders are TALLERS JASO INDUSTRIAL S.L. holding 49.99% shares and JASO Services Genrales S.L. Holding 50.01% each respectively. The principal activity of the company is supplying cranes and mechanical equipments to Indian customers. JASO INDIA has a well established distributions and marketing network in infrastructure industry. JASO INDIA is thus easily able to identify potential purchasers and procure order for cranes and mechanical equipments. The Cranes and its allied parts are imported from JASO Spain thereafter supplied to the client.

2 I.T.A. No.507/Kol/2017 Assessment Year: 2012-13 Jaso India Private Limited 3. The issues before us for adjudication are relating to the Transfer Pricing (TP) Adjustment and the disallowance made u/s 40(a)(ii) of the Act.

“2.1 TALLERES JASO INDUSTRIAL S.L. Company

TALLERES JASO INDUSTRIAL S.L. is a company incorporated under the laws of SPAIN having its registered office at T ALLERES JASO INDUSTRIAL S.L., CTRA,MADRID , IRUNKM- 426, 20249- ITSASONDO, GIPUZKOA ,SPAIN - 020249. It is a leading manufacturer and supplier of a wide range of lifting and transport systems mainly hoist standard cranes and special cranes. T ALLERES JASO INDUSTRIAL S.L. also provides the required technical expertise, technology, assistance, designs, drawings, training, and managerial advice and supervises activities of the Indian JV to ensure smooth operation and execution of the business in India. TALLERES JASO INDUSTRIAL S.L. specializes in the design, development and manufacture of a wide range of lifting and transport systems.

TALLERES JASO INDUSTRIAL S.L. was consolidated as the irrefutable leader and also boasts a notable presence on the international market in products called Hoists, Standard Cranes and Special Cranes.

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2.2 JASO India JASO India is a private limited company incorporated under the Companies Act, 1956. Ifs principal shareholders are TALLERES JASO INDUSTRIAL S.L. holding 49.99% shares and JASO Services Generales S.L. Holding 50.0 I % each respectively. The principal activity of the company is supplying cranes and mechanical equipments to Indian customers. JASO INDIA has a well established distribution and marketing network in infrastructure industry. JASO INDIA is thus easily able to identify potential purchasers and procure orders for cranes and mechanical equipments. The Cranes and its allied parts are imported from JASO Spain thereafter supplied to the client.”

At para 6.1. of the Transfer Pricing documentation it was stated as follows:- “6.1. For evaluating and applying the most appropriate method, one of the key tasks is the identification of the tested party, since the selection of most appropriate method would depend on the tested party under consideration. Selection of the tested party would precede selection of the most appropriate method, since arm's length price has to be determined using the most reliable data requiring minimum adjustments. Tested party is generally the one in case of which functions performed is least complex and for, which the comparable data is readily available. Considering the above factors, JASO India is considered as the Tested Party for the purpose of benchmarking analysis.”(Emphasis Ours)

4.1. Thereafter he held that, TNMM (Transactional Net Margin Method) is the most appropriate method (MAM) for determinations of ALP (Arm’s Length Price) of the international transactions and had rejected RPM (Resale Price Method), CUP (Comparable Uncontrolled Price Method) and PSM (Profit Split Method) on the ground that they were not appropriate methods in the given facts of the case. Thereafter it determined the ALP. The TPO in his order gave a showcause notice that he proposed to reject the assessee’s TP report. He undertook a search process for selection of appropriate comparables. The assessee had made various submissions before the TPO. After considering the objections of the assessee, basically with regard to the selection of comparables and determination of revised PLI (Profit Level Indicator) of the assessee, the ld. TPO determined the Arm’s Length Price at Rs.2,48,88,897/-.

4 I.T.A. No.507/Kol/2017 Assessment Year: 2012-13 Jaso India Private Limited 4.2.1 Aggrieved, the assessee carried the matter before the ld. DRP (Dispute Resolution Panel). The DRP had considered the submissions of the assessee that a) RPM was the MAM for determination of ALP b) The margin of the assessee should have been considered for eliminating the impact of foreign exchange fluctuations arising out of timing difference. c) While computing the PLI of the assessee, the TPO has erred in considering the impact of realised foreign exchange loss at the time of being the AE as operating loss.

The DRP called for the remand report from the TPO and the TPO vide his order dt. 21st October, 2016, had given a remand report, wherein he observed as follows:- “From the documents submitted by the assessee, it may be inferred that assessee procured orders from customers based on marketing functions and on awarding the same, places order on the AE who then manufactures the product as per the specifications. The manufacturing activity of the AE based on the order of assessee is covered under the agreement executed between the assessee and AE (Annexure 37). The function of buy and sale activity of the assessee is evidenced by the Registration Certificate received from the Central Excise department (Appendix 1).

He further held as follows:- “We have perused the documents, provided by the assessee vide various appendices, substantiating that the assessee assumes the marketing and price risk associated with the activity carried out by the assessee. From the additional evidence, it can be construed that the assessee has incurred marketing expenses (appendix 7 – invoices for marketing expenses) and price risk. The evidence submitted by the assessee highlights that the assessee lost orders to competition, had to reduce initial offers and in instances, there were no response on the offer made by the assessee form the customers (appendix 8 to 22).”

4.3. The TPO further concluded that a) The assessee bore credit risk. b) The assessee provides the product warranty to customers as well as foreign exchange risk. 4.4. On the assessee’s claim that the AE should be selected as the tested party, as it is the less complex entity, the TPO held that the same is patently an unacceptable position having no sanction of the Indian transfer pricing law. He further held that TNMM requires testing of the net margin earned by the Indian assessee and not its foreign AE,

5 I.T.A. No.507/Kol/2017 Assessment Year: 2012-13 Jaso India Private Limited which is compared with that of the comparable companies. He relied on certain rulings of the ITAT and concluded that, it is the Indian entity’s profitability from the international transactions that is required to be tested and the same has been invested from applicable TP Provisions. On application of RPM, he held as follows:- “The Registration Certificate from the Central Excise Department issued to the assessee as a dealer of the goods has been submitted as part of additional evidence (Appendix 1). The margin computation of the assessee and comparable company has been checked from respective financial statements.”

The TPO has not rejected the contentions of the assessee on application of RPM as the MAM or the margin computation made by the assessee and comparable companies selected by the assessee. The DRP, after considering this remand report in his order dt. 25/11/2016, stated as follows:- “The assessee has sought to invoke RPM claiming itself to be a plain distributor. Reseller Price Method can be used in case of plain distributor to measures functions performed and is appropriate in cases involving the purchase and resale of goods/services in which the buyer/reseller does not add value. It has been submitted by the assessee:- “Since its inception in 2008, the business objective of Jaso India was to build a strong customer base in India. In order to tap the market and expand its reach. Jaso India’s strategy was to reach out to potential customers to create the awareness of the products and offer the most competitive bid. During the year under consideration, Jaso India sold goods that were purchased from group entity and locally without any value addition.” Resale price method is applied when the product is delivered/resold without any value addition in the deliverable. The TPO has altered the tested party selection by the assessee and in view of the functional profile basis the material on record. Resale Price Method is to be applied when the reseller buys and sells the product as it is without adding any value to the product. In this case, the assessee, is delivering qualitative addition. Besides, it is incomprehensible as to how services/products denuded of value addition can be delivered while the assessee claims to function to create intangibles for the company and a sound market. The objection is therefore not tenable and the action of TPO is not applying RPM is correct and upheld. (Emphasis Ours) The impact of foreign exchange fluctuations is direct on the operating margins and is a valid factor while testing the entities under TNMM. The jurisprudence in this regard also holds forex fluctuations as operating in nature. The action of the TPO is as per procedure in this regard and is upheld. The objection is dismissed basis above discussions.

6 I.T.A. No.507/Kol/2017 Assessment Year: 2012-13 Jaso India Private Limited 5. without prejudice to above grounds, the ld. TPO and accordingly the ld. AO have erred in considering certain charges as operating in nature without giving due cognizance to the fact that these expenses were circumstantial and not incurred in the ordinary course of assessee’s business operation. DRP Directions: The panel has considered the submission and facts and the remand report dated 21/10/2016. The AO/TPO has also conceded the fact that the assessee is a dealer of the goods. The panel directs accordingly.”

As this legal aspect, as to whether creation of marketing intangibles by the assessee company results in rejection of RPM as MAM stands addressed by the above case-law and it is incumbent on the part of the Tribunal to adjudicate the same. It relied on the order of the Hon’ble Delhi High Court in the case of Alcatel Lucent India Pvt. Ltd vs DCIT -TS-437-HC-2017(DEL)-TP- ITA No. dated 21.05.2017, for the proposition that the Tribunal, when there is no new material, should not remand the matter back to the TPO. On the application of TNMM, he submitted that the AE of the assessee should be selected as the tested party, as it is an entity having lesser functions as compared to the

7 I.T.A. No.507/Kol/2017 Assessment Year: 2012-13 Jaso India Private Limited assessee’s functions. He further argued that the ld. TPO was wrong in holding that a foreign party cannot be selected as a tested party under the Indian Transfer pricing requirements.

6.1. The ld. D/R, relied on the order of the TPO as well as the DRP and submitted that the same should be upheld. He submitted that the foreign AE is a more complicated entity as it is involved in manufacturing and other activities and whereas the assessee has least complicated functions as it takes orders and places the same on AE and on the receipts of the goods sells it to its customers. On RPM being the MAM, he submitted that the assessee in its TP report has rejected this method. He submitted that the TPO has not examined the computation of ALP under RPM and hence, if the Bench comes to a conclusion that RPM as the MAM then the issue should be remitted to the file of the TPO for computation of the ALP.

6.2. The ld. Counsel for the assessee on the issue of disallowance of interest paid on delay deposit of taxes u/s 40(a)(ii) of the Act, relied on the decision of the Hon’ble Supreme Court in the case of Harshad Shantilal Mehta vs. Custodian [1998] 99 Taxman 216 (SC), and submitted that interest is compensatory in nature and is not a tax and hence the disallowance cannot be made u/s 40(a)(ii) of the Act. On the last ground, which pertains to erroneous addition of outstanding TDS demand, as per the ITS details, he submitted that the Assessing Officer may be directed to verify the same and pass appropriate orders. The ld. D/R, relied on the orders of the lower authorities on these two issues.

8 I.T.A. No.507/Kol/2017 Assessment Year: 2012-13 Jaso India Private Limited On both the issues, we find that the assessee has been shifting its stand. As extracted in the first part of our order, the assessee in its TP study, has specifically stated that RPM is not appropriate for being selected as the MAM. Similarly, on the issue of tested party it has categorically stated that the assessee company should be selected as the tested party, for the reason that the functions performed by the assessee is least complex. 8.1. The assessee seeks to alter this position by making submissions before the TPO, which are contrary to its conclusions drawn in the TP documentation.

8.2. Another contrary argument which has been advanced by the assessee is that, on the one hand it states that RPM is the MAM as the functions of the assessee company is that of a mere dealer of goods and on the other hand, it states that the foreign AE has to be selected as the tested party, though it is a manufacturing entity on the ground that the AE has least complex functions, has compared to the assessee company. If the functions performed by the assessee are complex, then RPM cannot be applied.

8.3. Be it as it may, the TPO, in the remand report as extracted above, has not disputed the claim of the assessee that RPM be considered as the MAM. In fact, he states that the facts that the assessee is a dealer in goods is supported by the Registration Certificate from the Central Excise Department. The facts that the TPO held that the assessee is a dealer in goods, is also recognised by the DRP. The sole ground on which the DRP has come to this conclusion that RPM should not be selected as the MAM is because the assessee is delivering quantitative addition. It also wondered as to how services/products can be delivered without value addition. It stated that the assessee claims creation of intangibles for the company. We also find that the assessee has admitted that it takes the marketing risk, price risk, credit risk, warranty risk and foreign exchange risk. Hence, in our view, this is not a simple case of marketing intangibles, being the only reason for not adopting RPM as the MAM. In its rejoinder to the remand report, the assessee has submitted as follows:- “As part of the submission and the additional evidences filed, it was demonstrated (though mail communication, invoices, winding up notices, copy of agreements/Purchase Orders etc.) the assessee assumes the following entrepreneurial risks:

9 I.T.A. No.507/Kol/2017 Assessment Year: 2012-13 Jaso India Private Limited Market and Price Risk -It is responsible for market penetration, customer mining, negotiation and price fixation and hence, assumes market risk (Documents filed vide Appendix 3 to Appendix 24 to the submission) Credit Risk - If there is any default in payment, the risk of non-recovery or delayed recovery is assumed by Jaso India (Documentary evidence submitted vide Appendix 25 to Appendix 36 to the submission to demonstrate the bad debt written-off in the accounts) Warranty Risk - Jaso India had submitted copy of relevant purchase orders/contracts executed with the customer for supply of cranes wherein, it is demonstrated that assessee provides warranty to the customer for any quality claim without any recourse to AE (Documents filed vide Appendix 37 to Appendix 41 to the submission) Foreign Exchange Risk - Jaso India assumes the said risk as it imports the goods from its AE in foreign currency and does not hedge its currencies Inventory Risk - Jaso India had incurred container detention charges (storage charges at custom's warehouse) of Rs. 28.07 lacs, for delay in agreed delivery schedule post receipt of goods in India Manpower Risk - Both Jaso Ind ia and its AE assumes the risk of recruiting and retaining key personnel for their respective business operation

Based on the functions and risk profiles of both the parties, the assessee has categorised itself as an entrepreneur taking entrepreneurial risk where as the AE has been categorised as a manufacturer engaged in manufacturing and supply of products based on confirmed order from Jaso India.

8.3.1. Further, as compared to its AE, the assessee claims that it performs the function of market research, customer mining, order program from customers, requirement analysis, quality checks, apart from the marketing, price, credit, bad debt, warranty, forex, inventory and manpower risk. With such a complicated profile, we are unable to accept the contentions of the assessee that RPM is the MAM. Hence, though the Assessing Officer has not specifically rejected the same, we uphold the order of the DRP on this issue for the reasons cited above. The assessee is not a dealer of goods simpliciter and performs many other functions. Even if RPM is taken as the MAM, then adjustments have to be made for these various risks being taken by the assessee. as this is not the plea of the assessee and as the assessee has itself admitted to many of the facts extracted above, we uphold the finding of the ld. DRP that RPM is not the MAM in this case.

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11 I.T.A. No.507/Kol/2017 Assessment Year: 2012-13 Jaso India Private Limited to a conclusion that the disallowance in question is bad in law. The Hon’ble Supreme Court in the case of Harshad Shantilal Mehta vs. Custodian (supra), had held as follows:- “…the definition of 'tax' under section 2(43) does not include penalty or interest. Similarly, under section 157, it is provided that when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand as prescribed.

11.1. Respectfully following the proposition of law laid down in the above referred judgment, we delete this disallowance and allow this ground of the assessee.

Kolkata, the 28th day of September, 2018.

Sd/- Sd/- [S.S. Viswanethra Ravi] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated : 28.09.2017 {SC SPS}

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Copy of the order forwarded to: 1. Jaso India Private Limited 1/1A Mahendra Roy Lane Block-1, Office Number-905 Kolkata – 700 046 2. Deputy Commissioner of Income Tax, Circle-11(1), Kolkata