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Before: SHRI N. K. SAINI & SMT SUCHITRA KAMBLE
These appeals are filed by the Revenue and the assessee against the order dated 23/9/2009 & 27/10/2009 for the Assessment Year 2003-04 & 2004-05 passed by CIT(A)-XX, New Delhi.
The grounds of appeal are as follows:
“1. Whether in the facts and circumstances of the case, the Ld.CIT(A) was right in rejecting addition of Rs.40096037/- to Rs.30569734/- by rejecting the comparables on the ground of related party transactions? 2. Whether in the facts and circumstances of the case, the Ld.CIT(A) was right in deleting the addition of Rs.134277/- on account of advances written off especially when no documentary evidence was filed by the assessee to substantiate its claim? 3. Whether in the facts and circumstances of the case, the Ld.CIT(A) was right in allowing relief of Rs.366000/- on account of Bad Debts written off especially when the assessee failed to satisfy basic condition laid down in Section 36(1) (vii) of the Act r/w Section 36(2) which stipulates that the debt should have been taken into account while computing income of the assessee in the previous year(s)? 4. Whether in the facts and circumstances of the case, the Ld.CIT(A) was right in allowing relief of Rs.5315240/- on account of subsidy brought forward as the assessee has not considered the C/f of subsidy in the income of current year which became property of the assessee at the time of receipt? 5. Whether in the facts and circumstances of the case, the Ld.CIT(A) was right by the IT Rules allows 60% depreciation only on computer and computer software? ITA NO. 4409/DEL/2009
1. Based on facts of the case, the order passed by the learned CIT (A) is bad in law in respect of the adjustment pertaining to the computation of the arm’s length price of the international transactions of the Appellant with its associated enterprises.
2. The learned CIT (A) has erred, in law and in facts, by upholding the reference made by the learned Assessing Officer (“AO”) to the Transfer Pricing Officer (“TPO”) under section 92CA of the Act to be correct. 3. The learned CIT (A) has erred, in law and in facts, in determination of the arm’s length price.
The learned CIT(A) has erred, in law and in facts, by not accepting the price paid by the Appellant for purchase of goods from its associated enterprises as an arm’s length price, as defined under section 92F(ii) of the Act.
5. The learned CIT (A) haserred, in law and on facts, by making (enhancing ) the adjustment of Rs 3,05,69,734/- to the income of the Appellant consequent to incorrectly computing the arm’s length price in respect of import of photocopier and fax machines by the Appellant from its associated enterprises. 6. That, such an adjustment is computationally incorrect since it factors in the custom duty paid to Indian Revenue and such enhancement of income is in breach of principles of natural justice, equity and fair play. 7. The learned CIT (A) has erred, in law and on facts, by upholding artificial segregation the distribution business of the Appellant into photocopier, fax machine segment and printer, scanners and cartridges segment. 8. The Ld.CIT(A) has erred, in law and in facts, by upholding the A.O/TPO’s position of rejecting the economic analysis performed by the Appellant and selecting one comparable company to bench mark the photocopiers and fax machine segment of the Appellant. 9. The Ld.CIT(A) has erred, in law and on facts while computing the gross margins of the Appellant in relation to photocopier and fax machine segment. 10. The learned CIT (A) has erred, in law and on facts, by not agreeing to computation of the working capital adjustment carried out by the Appellant to reflect the differing levels of trade receivables, trade payables and inventories (working capital adjustments) between the Appellant and the potential comparables. 11. The learned CIT (A) has erred, in law and on facts, by not appreciating the fact that while comparing the gross margins of Appellant with only one comparable company, it becomes necessary to factor in the significant differences on account of working capital employed and make an appropriate adjustment. 12. The learned CIT (A) has erred, in law and on facts, by not placing reliance on the recent judicial pronouncements and providing reasonable adjustments. 13. Thelearned CIT (A) has erred, in law and on facts, by not placing reliance on the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organization for Economic Co-operation and Development, July 1995.
14. The learned CIT (A) has erred, in law and on facts, by not providing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C(2) of the Act.
15. The learned CIT (A)has erred, in law and on facts, by ignoring the provisions of Rule 10B(4) of the Income Tax Rules, 1962 which envisage usage of multiple year data of comparable companies for the purpose of determination of the arm’s length price.
16. The learned CIT (A) has erred, in law and on facts upholding the order of the assessing officer in levying interest of under section 234B, 234C and 234D of the Act. ITA NO. 4856/DEL/2009
Based on facts of the case, the order passed by the learned CIT (A) is bad in law in respect of the adjustment pertaining to the computation of the arm’s length price of the international transactions of the Appellant with its associated enterprises.
2. The learned CIT (A) has erred, in law and in facts, by upholding the reference made by the learned Assessing Officer (“AO”) to the Transfer Pricing Officer (“TPO”) under section 92CA of the Act to be correct. 3. The learned CIT (A) has erred, in law and in facts, in determination of the arm’s length price. 4. Thelearned CIT(A) has erred, in law and in facts, by not accepting the price paid by the Appellant for purchase of goods from its associated enterprises as an arm’s length price, as defined under section 92F(ii) of the Act. 5. The learned CIT (A) haserred, in law and on facts, by making (enhancing ) the adjustment of Rs 10,41,38,214/- to the income of the Appellant consequent to incorrectly computing the arm’s length price in respect of import of photocopier and fax machines by the Appellant from its associated enterprises. 6. That, such an adjustment is computationally incorrect since it factors in the custom duty paid to Indian Revenue and such enhancement of income is in breach of principles of natural justice, equity and fair play.
The learned CIT(A) (A) has erred, in law and on facts, by upholding artificial segregation the distribution business of the Appellant into photocopier, fax machine segment and printer, scanners and cartridges segment.
The Ld.CIT(A) has erred, in law and in facts, by upholding the A.O/TPO’s position of rejecting the economic analysis performed by the Appellant and selecting one comparable company to bench mark the photocopiers and fax machine segment of the Appellant.
9. The Ld. CIT(A) has erred, in law and on facts while computing the gross margins of the Appellant in relation to photocopier and fax machine segment.
10. The learned CIT (A) has erred, in law and on facts, by not agreeing to computation of the working capital adjustment carried out by the Appellant to reflect the differing levels of trade receivables, trade payables and inventories (working capital adjustments) between the Appellant and the potential comparables.
The learned CIT (A) has erred, in law and on facts, by not appreciating the fact that while comparing the gross margins of Appellant with only one comparable company, it becomes necessary to factor in the significant differences on account of working capital employed and make an appropriate adjustment.
The learned CIT (A) has erred, in law and on facts, by not placing reliance on the recent judicial pronouncements and providing reasonable adjustments.
13. The learned CIT (A) has erred, in law and on facts, by not placing reliance on the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organization for Economic Co-operation and Development, July 1995.
14. The learned CIT (A) has erred, in law and on facts, by not providing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C(2) of the Act.
15. The learned CIT (A) has erred, in law and on facts, by ignoring the provisions of Rule 10B(4) of the Income Tax Rules, 1962 which envisage usage of multiple year data of comparable companies for the purpose of determination of the arm’s length price.
16. The learned CIT (A) has erred, in law and on facts upholding the order of the assessing officer in levying interest of under section 234B, 234C and 234D of the Act.
The facts of the case in brief are that the assessee company was incorporated on 11/12/1996 as a subsidiary company of Canon Singapore Pvt. Ltd and during the year under consideration the assessee company continued to be engaged in the manufacturing and trading of photocopiers, trading of tax machines, printers, scanner and calculators. Rental and service contracts of its products, software development and exports (developed through the STP undertaking of the assessee as well as by subcontracting it through the third parties) etc. During the year under consideration, the assessee company has shown total receipt of Rs.2,157,031,245/- which includes Rs.132,081,616/- on account of the production and export of the computer software by the STP undertaking of the assessee company. The major international transaction during the F.Y. 2002-03 is import of business machines and computer peripherals and spare parts from Associated Enterprises(AE). The assessee has relied upon Resale Price Method (RPM) as most appropriate method to establish that the international transactions entered into by it are at arm’s length price. The assessee applied filters such as functional differences, insufficient financial information, persistent operating losses, etc. for selecting the comparables. The gross margin earned by the assessee from its distribution segment during the FY 2002-03 is 21.84% and hence the assessee contended that it was at arm’s length with respect to its trading function. The assessee submitted before the TPO that inclusion of Ricoh India Limited and Gestetner India having substantial related party transaction appears to be acceptable since the extent of related party transactions is more than 50%. Hence these two comparables are excluded for the present study. However, in case of Xerox India Ltd. the extent of related party transactions is much lower than 50% and is therefore included as a comparable. Accordingly, the TPO has given final list of comparables for the trade of photocopiers and fax machines and their resale price margin is Kilburn Office Automation Ltd. (27.76) and Xerox India Ltd. (30.16) Thus, average resale price margin was determined at 28.96. Thus, the Arm’s Length Price of goods purchased from the AE and which were sold by the assessee during the FY 2002-03 is determined at Rs. 56,34,95,314 instead of Rs. 60,35,91,351 i.e. an amount lower by Rs. 4,00,96,037/-. The Assessing Officer made addition in respect of the advances written off to the extent of Rs. 8,02,598. The Assessing Officer also made addition in respect of bad debts written off to the extent of Rs. 3,66,000/-. The Assessing Officer made addition in respect of subsidy received in advance in the previous year 2002-03 from Canon Singapore Pvt. Ltd. but not utilized within the previous year to the extent of Rs. 2,06,39,500/- as well as the subsidy received in current year to the extent of Rs. 53,15,240/-. In respect of depreciation on computer accessories, the Assessing Officer made an addition of Rs. 83,681/-.
4. The Assessee filed appeal before the CIT(A). The CIT(A) upheld the addition made by the TPO to the extent of Rs. 3,05,69,734/- in respect of arm’s length price of import of business machines and computer peripherals and spare parts by the assessee from its AE which were sold. The CIT(A) held that since the Arm’s Length Price determined by the assessee is outside the range of ± 5%. Therefore, the benefit of proviso to Section 92C(2) cannot be given to the assessee. As related to disallowance of advances and deposits written off, the CIT(A) partly allowed the same in favour of the assessee by giving Rs.1,34,277/- relief. As relates to disallowance of bad debts written off, amounting to Rs.3,66,000/- and claimed as deduction u/s 28(i) read with Section 37(1) of the Act. The CIT(A) allowed the said disallowance. As related to taxation of unutilized subsidy the CIT(A) dismiss the ground of the assessee. As related to taxation of unutilized subsidy amounting to Rs. 53,15,240/- received in preceding years the CIT(A) allowed the same in favour of the assessee. In respect of claim of depreciation on certain computer accessories and peripherals the CIT(A) allowed the same in light of ITAT decisions in case of ITO Vs. Samiran Majumdar 280 ITR 74 & Container Corporation of India Ltd Vs. ACIT 2009 (30 SOT 284)(DEL). Interest charged u/s 234A, 234B, 234C & 234D was upheld by the CIT(A). Aggrieved by the said order of the CIT(A) the assessee and the Revenue both are in appeal.
The Ld. DR submitted that as relates to Ground No. 1 regarding relief of Rs. 95,25,303/- on account of TP adjustment and additional grounds no. 1 and 2 wherein relief was given despite not raised in the grounds of appeal
by the assessee in violation of Rule
46. A, the CIT(A) has allowed relief of Rs. 95,25,303/-, out of TP adjustment of Rs.4,00,96,037/- by excluding one comparable i.e. Xerox India Ltd., out of two comparables finally selected by the TPO, on account of high RPT (40.53%). The assessee never raised this issue before the TPO thus it was not examined by the TPO. The CIT(A) allowed relief despite the fact that the above ground, i.e. exclusion of Xerox India Lt. On account of high RPT, was not raised by the assessee before the CIT(A). The CIT(A) admitted the additional evidence and allowed relief without allowing the TPO an opportunity of rebuttal/examination as per the provision of Rule 46A. The ITAT has restored the matter to the TPO for the AY 2002-03 (ITA No. 3957/Del/2009) wherein identical issue was involved. Without prejudice to the above submission, the Ld. AR submitted that even on facts also the above relief is erroneous as RPT has not been correctly computed. The ITAT Delhi in case of Aithent Technologies (2016) 74 taxmann.com 214 (Delhi – Trib.) has held that RPT should be computed separately for purchases and sales respectively, i.e. with related party purchases (numerator) and total purchases (denominator) and with related party revenue and total sales (denominator), and then only the RPT filter should be applied. The Ld. AR furnished the figures of correct RPT computation as under:-
Total purchases (Expenses) from related parties = Rs. 8,065.90 lakhs Total expenses = Rs. 61,082.16 lakhs RPT = 13.20% Alternatively, Total revenue from related parties = 3,326.79 lakhs Total Sales = Rs. 47,084.80 RPT = 7% It was submitted that by either of the above computation, the RPT percentage is much less than 25% (which the accepted norm now) and even less than 15%
The Ld. DR submitted that as relates to Ground No. 2 regarding written off, the CIT(A) allowed relief of Rs. 1,34,277/-, out of advances and deposits written off amounting to Rs.8,02,598/-, on the ground that Rs.73,500/- is travel advance given to former employee, without appreciating that no evidence in this regard has been submitted by the assessee, and Rs.60,777/- is excess TDS deposited, without appreciating that excess TDS deposited is not an expenditure incurred wholly and exclusively for the purpose of business and no deduction can be allowed u/s 37(1) of the Act.
7. The Ld. DR submitted that Ground No. 3 regarding claim of Bad Debts of Rs. 3,66,000 written off, the CIT(A) failed to appreciate that the above payments have been made, on account of out of court settlement made with two parties, by the assessee as a result of infringement of the Consumer Protection Act. Complaints were filed by the above two parties against the assessee company and its MD for the violation of the provisions of the above Act. Thus, the above payments which have evidently been made to avoid criminal liabilities are not allowable deduction u/s 37(1) of the Act as per the explanation to Section 37(1) of the Act. The CIT(A) allowed relief by holding that the above amount is deductible u/s 37 (1) without appreciating the fact that the original claim of deduction was made by the assessee as bad debts written off which was rejected by the AO on the ground that the debts were not taken into account while computing the income of earlier assessment years. No claim of deduction u/s 37(1) was made before the AO and thus the above claim was not examined by the AO from the point of view of deductibility u/s 37(1). The CIT(A) without providing any opportunity to the AO allowed relief to the assessee. Thus, this issue is required to be restored back to the AO for examination of its claim of deduction u/s 37(1) of the Act.
8. The Ld. DR further submitted that Ground No. 4 relating to relief of Rs. 53,15,240/-, the CIT(A) allowed relief of Rs. 53,15,240/-on account of unutilized subsidy received in the A.Y. 2002-03 on the ground that the above subsidy amount has been included in the subsidy amount of Rs.9,09,88,168/- which has been utilized during the year. The CIT(A) allowed relief on the ground that the above amount has been doubly taxed by the AO. It is pertinent to mention that the addition of the above amount by the AO for the A.Y. 2002- 03 has been deleted by the ITAT (ITA No. 4040/Del/2010, dated 19.10.2016). Thus, now it is not a case of double taxation by the AO. Besides the above, the reconciliation chart submitted by the assessee before AO, as given at pg. No. 7 of the Assessment Order, and the reconciliation chart submitted by the assessee before the CIT(A), as given at pg. no. 30 of the appellate order, are different raising serious concerns about the authenticity of the above reconciliation. In the chart submitted before the AO the assessee has disclosed subsidy of Rs. 9,09,88,168/- received during the A.Y. 2003-04 excluding the above subsidy amount, whereas in the chart submitted before the CIT(A) the assessee disclosed subsidy of Rs. 9,09,88,168/-, including the above subsidy. The CIT(A) accepted the improved version of the reconciliation chart submitted during the appellate stage without raising any query and without providing AO any opportunity of rebuttal under Rule 46A.
The Ld. DR submits that Ground no. 5, the items like Switch Board for Computers, CD Writer, Server Racks and Switches are not integral part of Computer Systems and cannot be classified as Computer Peripherals. Thus depreciation @ 60% cannot be allowed to the assessee.
The Ld. AR submitted that consistency has to be maintained. The CIT(A) rejected M/s Xerox India Ltd. as a comparable for having high RPT in AY 2004- 05, and the said decision of CIT(A) has not been challenged by the Department before the ITAT, meaning thereby, the said order has been accepted by the Department. Considering the principle of consistency, Department should not be allowed to contest exclusion of M/s Xerox India Ltd. from the list of comparables in this Assessment Year.
11. The Ld. AR further submitted that the additional ground raised by the Revenue is not just and proper as the TPO/AO has erred in claiming that the adjudication by the CIT(A) on the removal of M/s Xerox India Ltd. from the final set of companies is incorrect and in violation of Rule 46A of the I. T. Rules. The Ld. AR further submitted that the assessee has not violated the Rule 46A of the Rules in any manner as submission on RPT were based on financials which are available in public domain and do not amount to additional evidence within the scope of Rule 46A of the Rules. Further, the CIT(A) had directed to file the said information. Thus the information provided to the CIT(A) was not in the nature of ‘additional evidence’. The Ld. AR relied on the decision of Hon’ble Madras High Court in the case of CIT vs K.K.S.K Leather Processor (P.) Ltd. (2007) 292 ITR 669 (Mad), wherein the Hon’ble Court held that verification of regular accounts could not be considered as additional evidence to be called as violation of Rule 46A. Further, the details of RPT of comparable M/s Xerox India Ltd. was available with the TPO, which is evident from order of TPO wherein he has recorded his finding in relation to RPT of M/s. Xerox India Ltd. and after adopting the threshold of 50% RPT, has accepted M/s Xerox India Ltd. to be included as a comparable. Therefore, the TPO/AO erred in claiming that removal of M/s Xerox India Ltd. as comparable on RPT by CIT(A), is in violation of Rule 46A of the Rules. The TPO is required under the law to determine the ALP of the international transaction as per the relevant provisions of the Act. The onus to identify comparable uncontrolled transactions rest on the TPO, which means that the companies which do not satisfy the RPT threshold cannot be treated as comparable companies. Reliance was placed on Rule 10B(1)(b) of the Rules, which provides the manner in which RPM is to be applied; it clearly provides that the tested transaction must be compared with the comparable uncontrolled transaction for the purpose of determination of ALP. The Ld. AR further submits that although the rejection of comparables based on RPT was not specifically pleaded in the grounds along with Form 35 before the CIT(A) the same were discussed in great details and submitted subsequently during the course of hearing. The same has also been recorded in the order of the CIT(A). In this regard, the Ld. AR placed reliance on the decision of the Hon’ble jurisdictional High Court in case of Commissioner of Income Tax vs Jindal Saw Pipes (2010) 328 ITR 338 (Del) where in it is held that the authority of the Commissioner is co-extensive with that of the Assessing Officer. Moreover, Section 250(5) of the Act, 1961 allows the Assessee to raise an issue not even forming part of the grounds of appeal and even if a question has not been specifically pleaded in the grounds, the same if pleaded during the course of hearing can be adjudicated upon by the Court. This authority of the CIT(A) to adjudicate on grounds which has initially not been pleaded before him but evident from the facts before him arises from the fact that the powers of the CIT(A) is co-extensive with that of the AO. The same has been held in a plethora of cases, some of which are mentioned below:
i. Jute Corporation of India vs. CIT (1990) 88 CTR 66 (SC) ii. CIT vs. Pioneer Press Pvt. Ltd. (2001) 170 CTR (Mad.)
12. The Ld. AR further submitted that RPT computation provided to the CIT(A) based on financial statements, which were available in the public domain and also relied upon on the TP documentation cannot per se be termed as additional evidence. Notwithstanding and without prejudice, even if it is assumed for the sake of argument that the same can be classified as additional evidence, the powers of the CIT (A) being co-terminus to that of the TPO/AO, the CIT(A) was well within his rights to examine the same. Thus, the addition made has been rightly deleted by the CIT(A).
13. As relates to assessee’s appeal being the Ld. AR submits that Ground No. 1, 3 and 4 are general in nature and Ground No. 2 is not pressed. As regards to Ground No. 6 relating to segregation of distribution business, the Ld. AR submitted that the TPO’s observation that the two segments have ‘entirely different target customers’ are factually incorrect. The Ld. AR submits that not only that there is overlapping of customers but also the functional asset and risk profile (“FAR”) is same in relation to distribution activity undertaken for each of the products sold by the Assessee. The Assessee adopts the same distribution channels for sale of all products and utilizes the same assets / infrastructure in relation to the said activity. The same employees are employed for undertaking marketing and operational activities for all products and common advertising and promotional initiatives are undertaken by the Assessee for the sale of products in India. Thus, based on the detailed FAR of the Assessee as provided in the TP Report, no distinction can be made between the various products distributed by the Assessee in India. Also, it is pertinent to note that credit period and inventory holding period for all products purchased by the Assessee from its AE is same. Further, similar credit period is provided by the Assessee to its customers in India for all products. In support of the above submissions, the assessee submitted documents as under:
Invoices showing billing of photocopier and printers to same • customers Comprehensive advertisement for all the business segments i.e. • photocopier, printers, etc. Payments and purchase invoices for all the product categories •
The Ld. AR further submitted that it is common for resellers and distributors to benchmark their international transactions using portfolio approach where goods for example split air conditioners, window air conditioners and industrial air conditioners would be all aggregated and benchmarked together, given the similarity of functions. Reliance is placed on Rule 10A(d) of the Income Tax Rules, 1962 which provides that “transaction includes a number of closely linked transactions. ” The aforesaid Rule clarifies that while section 92 of the Act uses the phrase “international transaction the term transaction includes a number of closely linked transactions. Thus, the current scheme of the Act provides for an aggregation approach. If the word “transaction” is to be read as “singular”, as the CIT(A) had proposed, it would lead to an absurd interpretation that every time the Assessee imported a Canon product from its AE, the same would have to be benchmarked and documented separately. Thus a reasonable interpretation of the term “transaction” allows the Assessee to benchmark all its international transactions with respect to import of finished goods for resale to be benchmarked together. This view is also echoed in the OECD TP Guidelines 2010 in Para 3.9 and 3.10, which acknowledges that there may be situations where separate transactions are so closely linked that they cannot be evaluated adequately on a separate basis. Para 2.24 of the Guidelines also clearly state that while adopting RPM, functional similarity is more important than product similarity. This view is also reiterated in Para 2.28 of the Guidelines.
The Ld. AR further submitted that in view of the criteria prescribed by the Rules, nature, class of the transactions and the availability, coverage, reliability of data, and guidelines issued by the OECD Guidelines, RPM was considered as being the “most appropriate method” to establish the arm’s length nature of the distribution function of the Assessee. It may be appreciated that RPM entails a comparison of the gross margins of functionally similar international transactions. The use of gross margins is undertaken on account of similarity of functions (in this case, distribution of products) rather than similarity of product lines. When undertaking a gross profit analysis, the emphasis should be more on the comparability of the functions performed, the assets utilized and the risks assumed in relation to the products rather than the products themselves. The Ld. AR relied upon US TP regulations which categorically state that “grouping is also the norm with the resale price method or the cost plus method.” The Ld. AR relied upon the following decisions of the Tribunal where it has been held that similar transactions which are interlinked should be aggregated for the purposes of benchmarking;
■ M/s Panasonic India Private Limited vs ITO [2011] 43 SOT 68 (Del) ■ M/s Toyota Kirloskar Motor (P) Ltd. vs ACIT [2014] 166 TTJ (Bang) 189 ■ Godrej Sara Lee Ltd. vs Addl. CIT ■ Godrej Sara lee Ltd vs Add. CIT ITA No. 1251 & 1356/Mum/2014 Boskalis International Dredging International CV vs DDIT (ITA 4862/Mum/2008) ■ Cummins India Ltd. vs ACIT bearing ITA No. 1616/PN/2011 ■ Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT [2013] 56 SOT 187 (Pune).
Thus, the Ld. AR submitted that the CIT(A) / TPO have erred in rejecting the aggregation approach to benchmark the distribution segment. Further, The Ld. AR also submitted that the TPO has emphasized on the fact that scanners falls under the category of household products and CIT(A) further upheld the same view. In this regard, it is debatable to say if products like scanners are household products be it the year under consideration or even today. Thus, the TPO’s premise to artificially segregate the distribution segment is very subjective and devoid of any commercial rationale. Benchmarking distribution function de hors artificial segment accepted in subsequent years. The Ld. AR submitted that in the subsequent years (from AY 2005-06 onwards) the AO / TPO has accepted the aggregation approach undertaken by the Assessee relating to the sale of imported goods and has not artificially bifurcated the traded goods in segments for the purposes of benchmarking. Reliance in this regard is placed on the judgment of Hon’ble Supreme Court in CIT vs Radhasoami Satsang Saomi Bagh vs CIT [1992] 193
ITR 321 (SC), wherein, principle of consistency has been upheld. Reliance is further placed on the following decisions:
� CIT vs Excel Industries: [2013] 358 ITR 295 (SC) � Brintons Carpets Asia P. Ltd. vs DCIT (2011) 46 SOT 289 (Pune) � Clariant Chemicals (India) Ltd. vs JCIT: & 2393 Mum/2011 � VIHI, LLC vs Addl. DIT: ITA No. 17/MDS/2012 � KTC Ferro Alloys (P.) Ltd vs Addl. CIT: [2014] 161 TTJ 228 (Visakhapatnam - Trib.) � Hosley India (P.) Ltd. vs DCIT (ITA. No. 5904/Del/2010 (If aggregation principle is accepted, then the original comparable set of 11 companies less companies rejected by CIT(A) and TPO for having high RPT should be restored)
The Ld. AR submitted in respect of Ground No. 7 that the CIT(A) erred in upholding AO/TPO’s position of rejecting economic analysis performed by the Assessee and selecting one comparable. The Ld. AR further submitted that Assessee in its TP study for the purposes of benchmarking the international transaction of import of goods, had taken comparable companies engaged in distribution of photocopiers, fax machines, scanners, printers and other similar products. However, the TPO artificially bifurcated the distribution segment of the Assessee into sub segments based on products, which was not based on sound premises and devoid of commercial rational. Further, without prejudice to the above that segregation was erroneous, the TPO while proposing an adjustment in relation to product segment pertaining to photocopiers and fax machine and others, erred in cherry picking comparable companies and disregarded certain comparable companies selected by the Assessee in the TP report, which were engaged in distribution of similar products. It is the submission of the Assessee, that even if segregation approach is to be adopted, the CIT(A) / TPO have erred in rejecting the other comparable companies in the TP report, without passing a speaking order in this regard or adjudicating on rejection of such comparable companies.
As regards to Ground No. 8, 9, 10 relating to the working capital adjustment, the Ld. AR submitted that the detailed working capital adjustments were submitted by the Assessee with the CIT(A). A revised working capital adjustment is also being submitted before the Tribunal during the present hearing. The Ld. AR further submitted that the TP regulations mandate providing for, inter alia, working capital adjustments. Rule 10B(1)(b)(iv) of the Rules provides for making appropriate adjustments on account of functional and other differences between the tested party and the comparable companies, while applying RPM. Similarly, Rule 10B(3) of the Rules, in order to establish comparability between the international transaction and an uncontrolled transaction, also advocate for eliminating differences between the enterprises/transactions, which materially affect the price/profit of the transaction in an open market, by way of providing reasonably accurate adjustments. As a sequitur, if reasonable accurate adjustments cannot be provided to eliminate differences, the company must be rejected as a comparable company. The Ld. AR submitted that the Assessee selected a bigger set of comparables (to account for differences) but due to bifurcation of distribution segment and selection of only one comparable (for photocopiers & fax machines segment) by TPO & CIT(A), being M/s Kilburn, it became necessary for the Assessee to carry out working capital adjustments. Working capital adjustment are an important adjustment to be carried out at gross level comparison. In case the working capital adjustment is not carried out then M/s Kilburn should be dropped as a comparable. Even general prudence fails to justify the actions of the TPO / CIT(A) because in effect the amount of TP adjustment is not so much linked to the import price of the Assessee but more to how well Kilburn as a company performs on a gross profit level. The gross profit margin for the M/s Kilburn and the Assessee is submitted in the paper book. It was submitted that Para 3.49 of the OECD guidelines at page 122 also states that working capital adjustment should be provided to eliminate the differences in payables and receivables while arriving at the ALP. The Ld. AR also submitted that the CIT(A) has observed in his order in para 11.15 that while determining the working capital adjustment of M/s Kilburn the Assessee has considered only the sales of plane paper copier and fax machines where as the inventory, debtors and creditors has been taken on an entity level, the same should also be limited to the segmental sales as mentioned above. In this regard, it is submitted that the working capital adjustment has been computed based on the proportionate creditors, debtors, and inventory with respect to the sales, and the same is in line with the methodology as provided by OECD. It is also submitted that in the case of the Assessee, the adjustments are made, based on published annual reports of the comparables, which were audited and available in the public domain. Further it may be appreciated that exact segmental creditors and debtors for M/s Kilburn are not available in the public domain. The Ld. AR further submitted that the international transactions were concluded to be at arm’s length in the TP documentation and hence it would not make a significant difference, even if the Assessee did not specifically make a claim for any adjustment. Accordingly, the working capital adjustments cannot be denied in the case of the Assessee for the mere reason that it was not specifically claimed in the documentation. The Ld. AR submitted that the term ‘reasonably accurate adjustments’ do not mean that the adjustments is permissible only if they are precise and accurate.
The Ld. AR explained the interpretation of the term ‘reasonable certainty’ in the legal dictionaries as under:-
• Black’s law dictionary, sixth edition
“To establish damages for lost profits due to breach of contract with “reasonable certainty does not mean that such damages must be established in exact pecuniary amount; evidence must however lay some foundation enabling fact finder to make fair and reasonable estimate of amount of damage”.
• “Reasonable’ means fair, proper, moderate, suitable under the circumstances. Fit and appropriate to the end in view. Having the faculty of reason; rational; governed by reason; under the influence of reason. Thinking, speaking or acting according to the dictates of reason. Not immoderate or excessive, being synonymous with rational, honest, equitable, fair, suitable moderate, tolerable. ”
• Words and Phrases
“For purpose of requirement that damages be proven to reasonable certainty, “reasonable certainty” signifies nothing more than probability and is found to refer to kind of evidence required rather than quantum of proof. – (GPL Treatment Ltd vs Louisiana- Pacific Corp., 894 P.2d 470, 133 Or. App. 633, review allowed 898 P.2d 770, 321 Or. 396.) ”
• “Reasonable certainty does not require mathematical exactitude, but only that damages be taken out of realm of speculation. (Bumgarner v. Bumargner, 862 P. 2d 321, 124 Idaho 629.)”
In light of the above, the Ld. AR submitted that adjustments could be properly made, to the extent appropriate under the circumstances and are based on reason, thus it would be ‘reasonably accurate’ and should be granted to the Assessee. As per the requirement of law, adjustment are carried out with a reasonable accuracy on the basis of reliable information available in the public domain - Assessee cannot be expected to obtain segment wise financials of the comparables, which are not in the public domain. It is submitted that the rejection of the Assessee’s approach by the CIT(A) is merely based on assumptions and surmises that the working capital position would be very different from the individual business segments, from the entity wide position.
The Ld. AR relied upon the following decisions, wherein adjustments with regard to differences in working capital, has been upheld:
� Federal Mogul Automotive Products vs DCIT bearing ITA No. 5881/Del/2012
� United Health Group Information Services Pvt. Ltd. vs ACIT [2014] 151 ITD 556 (Delhi) � Tata McGraw Hill Education vs ACIT: [2016] 69 taxmann.com 418 (Trib.) � Westfalia Seperator India Pvt. Ltd. vs ACIT [2014] 165 TTJ (Delhi) 56 � Mercer Consulting (India) Pvt. Ltd. vs DCIT [2014] 150 ITD 1 (Delhi-Trib) � Mentor Graphics (Noida) Pvt Ltd vs DCIT [2007] 112 TTJ 408 (Del) � Skoda Auto India (P) Ltd vs ACIT [2009] 122 TTJ 699 (Pune)
As regards to Ground No. 5 relating to incorrect computation of Arm’s length price adjustment in respect of import of photocopier and fax machines, the Ld. AR submitted that the absence before the CIT(A) vide submissions dated September 10, 2009 (refer page 47 of Paper Book-I) submitted that the cost of goods sold (“COGS”) should be adopted as INR 60,32,21,498/- whereas the CIT(A) while computing the TP adjustment has erroneously taken the COGS as INR 60,35,91,351/- (i.e., without reducing the value of goods capitalized amounting to Rs.,3,69,853). The Ld. AR further submitted that the goods capitalized amounting to Rs.,3,69,853 should have been reduced by the CIT(A) before computing the gross margins / adjustment. Further, for the present Assessment Year, the Assessee had imported finished goods from its AEs for resale in India. On import of such finished goods into India, the Assessee had paid high customs duty and hence adjustment should be computed after excluding the effect of custom duty from the cost of goods sold. The rate of customs duty on the various goods imported by the Assessee are announced and determined by the Department of Revenue, Ministry of Finance, Government of India. For the sake of convenience, the customs duty rates have been provided below: Effective Special Countervailing Products Basic Custom Duty Duty Duty Additional Photocopiers 35% 16% 4% 62.86% Fax Machines 15% 16% 4% 38.74% Assessee imported finished goods from its AEs for resale in India. On import of such finished goods into India, Assessee paid high customs duty, whereas, in the case of M/s Kilburn, the purchases are both sourced locally and from outside India. While, entire purchase by the Assessee represented imports and on which custom duty was paid; in contrast, only 50% (approx) of the purchases of M/s Kilburn represent imports. There is a significant difference on account of custom duty and it is submitted that appropriate adjustments be made to the gross margins after eliminating the impact of custom duty from the Assessee as well as M/s Kilburn. The margin of M/s Kilburn after excluding the customs duty is 41.7% percent whereas the margin of the Assessee after removal of customs duty from the price is 53.28%, which is higher than that of the M/s Kilburn and thus the international transaction of import by the Assessee is at arm’s length.
The Ld. AR further submitted that ground No. 11 is general in nature, Ground No. 12 and 13 are not pressed and Ground No. 14 is consequential in nature.
We have heard both the sides and perused all the material available on the records. First, we take up the Revenue’s appeal.
22.1 In respect of Revenue’s appeal, Ground No. 1 is related to transfer pricing and is of rejection of comparables on the ground of related party transactions and Additional Ground No. 1 and 2 wherein relief was given despite not raised in the grounds of appeal by the assessee in violation of Rule 46A of the Income Tax Rules, 1962 by the CIT(A). As relates to Ground No. 1 regarding relief of Rs. 95,25,303/- on account of TP adjustment and additional grounds no. 1 and 2 wherein relief was given despite not raised in the grounds of appeal by the assessee in violation of Rule
46. A, the CIT(A) has allowed relief of Rs. 95,25,303/-, out of TP adjustment of Rs.4,00,96,037/- by excluding one comparable i.e. Xerox India Ltd. out of two comparables finally selected by the TPO, on account of high RPT (40.53%). The assessee never raised this issue before the TPO thus it was not examined by the TPO. The CIT(A) allowed relief despite the fact that the above ground, i.e. exclusion of Xerox India Ltd. on account of high RPT, was not raised by the assessee before the CIT(A). The CIT(A) admitted the above additional evidence and allowed relief without allowing the TPO an opportunity of rebuttal/examination as per the provision of Rule 46A. The ITAT has restored the matter to the TPO for the AY 2002-03 (ITA No. 3957/Del/2009) wherein identical issue was involved. The relevant extract of the said ITAT order is as under:
“12. We, however, find that while accepting the submissions dated 28/7/2009 of the assessee on the issue of using the comparable companies having related party transactions by the TPO, the ld. CIT(A) (Appeals) has not got verified from the Learned TPO the details of computation of related party transaction of comparable companies as well as the details of purchase of finished goods by comparables from its related parties as a percentage of total purchases summarized before him for the first time. To this extent, we agree with the Ld. CIT(DR) that there is substance in the issue raised in the additional ground No. 2 regarding violation of Rule 46A of the I.T Rules and hence, allow this ground.
In result, we set aside the matter to the file of the Learned TPO to verify the correctness of the above submissions dated 28/7/2009 of the assessee, reproduce at Page Nos. 35 & 36 of the first appellate order vide Para No. 10.3.5 and if he finds that the above submissions of the assessee are not correct then decide the issue afresh after affording opportunity of being heard to the assessee. Since grounds are inter-connected, in result these are allowed for statistical purposes.
14. In result, the appeal is allowed for statistical purposes.” The issue was never raised before the CIT(A) and Rule 46A do not permit to take up any issue which was not before the CIT(A) without allowing the opportunity of being heard. Therefore, the Rule 46A was not properly invoked by the CIT(A). Yet, the issue of comparable has to be decided by the TPO, therefore, the same is restored back to the file of the TPO to be decided as held in the earlier Assessment Year by this Tribunal. Needless to say that, the assessee be given an opportunity of being heard.
22.2 In result, Ground No. 1 and Additional Ground Nos. 1 and 2 of the Revenue’s Appeal are partly allowed for statistical purposes.
22.3 The second ground of Revenue’s appeal is that of deleting the addition on account of advance written off. The CIT(A) has called for the details of advances and deposits written off during the appellate proceedings and verified the same. It was observed by the CIT(A) that Rs. 73,500/- was on account of travel advances given to former employees who were no longer employed with the assessee company and were not traceable and Rs. 60,777/- relates to excess TDS deposited. These expenses were incurred during the course of regular business and therefore, the CIT(A) rightly allowed as deduction under Section 28(i) read with Section 37(1) of the Act. For Rs. 6,68,321, the assessee has merely stated that they pertain to irrecoverable trade advances given to various vendors, defalcation made to employee etc. without furnishing any documentary evidence regarding the nature of these expenses. Therefore, the CIT(A) rightly disallowed the same. There is no need to interfere with the findings of the CIT(A) who has taken cognizance of all the relevant evidence put before the appellate authority.
22.4 In result, Ground No. 2 of the Revenue’s appeal is dismissed.
22.5. Ground No. 3 is related to bad debts written off, the impugned payments have been made, on account of out of court settlement made with two parties by the assessee, as a result of infringement of the Consumer Protection Act. Complaints were filed by the two parties against the assessee company and its MD for the violation of the provisions of the above Act. Thus, the above payments which have evidently been made to avoid criminal liabilities are not allowable deduction u/s 37(1) of the Act as per the explanation to Section 37(1) of the Act. The CIT(A) allowed relief by holding that the above amount is deductible u/s 37 (1) without appreciating the fact that the original claim of deduction was made by the assessee as bad debts written off which was rejected by the AO on the ground that the debts were not taken into account while computing the income of earlier assessment years. No claim of deduction u/s 37(1) was made before the AO and thus the above claim was not examined by the AO from the point of view of deductibility u/s 37(1). The CIT(A) without providing any opportunity to the AO allowed relief to the assessee. Thus, the Revenue’s contentions that this issue is required to be restored back to the AO for examination of its claim of deduction u/s 37(1) of the Act is accepted. This issue is restored to the file of the Assessing Officer. Needless to say that the assessee be given opportunity of hearing.
22.6 In result, Ground No. 3 of the Revenue’s appeal is partly allowed for statistical purpose.
22.7 Ground No. 4 is on account of subsidy brought forward. The CIT(A) allowed relief on the ground that the above amount has been doubly taxed by the AO. It is pertinent to mention that the addition of the above amount by the AO for the A.Y. 2002-03 has been deleted by the ITAT (ITA No. 4040/Del/2010, order dated 19.10.2016). Thus, now it is not a case of double taxation by the AO. Besides the above, the reconciliation chart submitted by the assessee before AO, as given at pg. No. 7 of the Assessment Order, and the reconciliation chart submitted by the assessee before the CIT(A), as given at pg. no. 30 of the appellate order, are different raising serious concerns about the authenticity of the above reconciliation. In the chart submitted before the AO the assessee has disclosed subsidy of Rs. 9,09,88,168/- received during the A.Y. 2003-04 excluding the above subsidy amount, whereas in the chart submitted before the CIT(A) the assessee disclosed subsidy of Rs. 9,09,88,168/-, including the above subsidy. The CIT(A) accepted the improved version of the reconciliation chart submitted during the appellate stage was accepted by the A.O without raising any query and without providing AO any opportunity of rebuttal under Rule 46A. Thus, the Ld. DR’s submission is accepted and this issue is remanded back to the file of the AO for the verification. Needless to say, the assessee be given hearing.
22.8 In result, Ground No. 4 of the Revenue’s appeal is partly allowed for statistical purposes.
22.9 Ground No. 5 is related to depreciation. The items like Switch Board for computers, CD Writer, Server Racks and Switches are necessary for Computer Systems and are classified as Computer Peripherals. Thus, the CIT(A) has rightly allowed the said depreciation on the computer accessories and peripherals. There is no need to interfere with the findings of the CIT(A).
22.10 In result, Ground No. 5 of the Revenue’s appeal is dismissed.
In result, Revenue’s appeal is partly allowed for statistical purpose.
Now, we come to the appeal of the assessee.
24.1 Ground No. 1 is general and 2 is not pressed by the assessee. Ground Nos. 3 & 4, 11 are again general in nature. Ground No. 12 & 13 are not pressed. Ground No. 14 is consequential in nature. Therefore, these grounds of the assessee’s appeal do not require any adjudication on our part.
24.2 Ground No. 5 is related to incorrect computation of Arms Length Price paid by the assessee in respect of import of photocopiers and fax machines. Before the Assessing Officer as well as the CIT(A), all the relevant records were produced but the same were not properly verified. As in the Revenue’s appeal the Transfer pricing issue is already remanded back to the file of the TPO/A.O.
Therefore, this issue is also remanded back to the file of TPO/A.O. Needless to say, the assessee be given opportunity of being heard.
24.3 In result, Ground No. 5 of the assessee’s appeal is partly allowed for statistical purpose.
24.4 Ground No. 6 is related to segregation of distribution business. The TPO’s premise to artificially segregate the distribution segment needs to be looked into as the comparables has to be examined by the TPO/A.O. Transfer pricing issue is already remanded back to the file of the TPO/A.O. Therefore, this issue is also remanded back to the file of TPO/A.O. Needles to say, the assessee be given hearing.
24.5 In result, Ground No. 6 of the Assessee’s appeal is partly allowed for statistical purpose.
24.6 Ground No. 7 of the assessee is relating to rejecting the economic analysis perform by the assessee and selecting one comparable. This issue is also covered in Revenue’s appeal. Therefore, this issue is also remanded back to the file of TPO/AO. Needless to say, the assessee be given hearing.
24.7 Hence, in result, Ground No. 7 of the assessee’s appeal is partly allowed for statistical purpose.
24.8 Ground No. 8, 9 & 10 of the assessee’s appeal relating to working capital adjustment, this issue is remanded back to the file of the TPO/A.O as was done in the revenue’s appeal, the same needs not to be answered at this stage.
24.9 In result, Ground No. 8, 9 &10 of the Assessee’s appeal are partly allowed for statistical purpose.
In the appeal in for A.Y. 2004-05 filed by the assessee identical issues are involved as were in ITA No.4409/Del/2009 (supra) therefore, the same are also remanded back to the file of the TPO/AO as was done in Assessment Year 2003-04.
In result, the appeal of the Revenue as well as of the Assessee are partly allowed for statistical purpose.
The order is pronounced in the open court on 15TH of June, 2017.