Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आदेश / ORDER PER SUSHMA CHOWLA, JM:
The appeal filed by the assessee is against the order of JCIT, Range 6, Pune, dated 30.12.2013 relating to assessment year 2009-10 passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:- 1. The transfer pricing proceedings initiated by the learned AO under section 92CA(1) of the Act are without any jurisdiction and ought to be quashed.
2 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
On the basis of the facts and in the circumstances of the case and in law the learned AO in pursuance of the directions given by the learned DRP erred in assessing the income of the appellant at INR 1,74,66,480 as against the returned loss of INR 7,13,86,774. 3. On the basis of the facts and in the circumstances of the case and in law the learned AO in pursuance of the directions given by the learned DRP erred in confirming the addition of INR 8,88,53,258 being upward adjustment made by the learned Transfer Pricing Officer (TPO) while determining the arm's length price in respect of international transactions with regard to provision of engineering design services. 4. The AO/DRP/TPO erred in rejecting CUP as the most appropriate method (MAM) to determine the arm's length price of the international transactions as applied by the appellant. 5. The AO/DRP/TPO erred in determining the arm's length price of the international transactions by applying Transactional Net Margin Method (TNMM) as MAM. 6. While applying the TNMM, the AO/DRP/TPO erred in the following : a. Did not disclose the search process (if any) carried out in this regard; b. Rejected the scientific search process carried out by the appellant without providing any cogent reason; c. Selected the companies which are not functionally comparable to the business of the appellant; 7. The AO/DRP/TPO erred in not considering the appellant's claim for deduction of extra-ordinary cost in relation to under-utilisation of capacity of manpower and infrastructure while computing the operating margin of the appellant. 8. The AO/DRP/TPO erred in rejecting the audited segmental accounts after deduction of extra-ordinary costs submitted by the appellant in relation to its transaction with AE as well as non-AEs. The AO/DRP/TPO also failed to appreciate the fact that based on segmental accounts submitted by the appellant the operating profit margin of appellant is higher as compared to the comparable company's margin even while applying TNMM. 9. The AO/DRP/TPO erred in rejecting the internal TNMM analysis conducted by the assessee for benchmarking the international transactions. 10. The AO/DRP/TPO erred in not granting the relief as provided in second proviso to section 92C(2) of the Act. 11. The learned AO in pursuance of the directions of DRP erred in levying interest under section 234A, 234B, 234C, 234D and 201(1A) of the Act. 12. The learned AO in pursuance of the directions of DRP erred in initiating penalty proceedings under section 274 r.w. section 271(1)(c) of the Act.
Briefly, in the facts of the case, the assessee had furnished return of income declaring total income at Nil after claiming loss of ₹ 7,13,86,774/-. The assessee
3 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
was rendering engineering design services, in the automobile sector to the foreign and domestic sector. The assessee was subsidiary company of Magna Steyr Fahrzeougtechnik AG & Co KG, Austria. The assessee was a registered 100% Export Oriented Unit. The assessee was Engineering Centre for Magna Styer Group and it provided engineering and design services, sourcing services to associated enterprises and domestic non-associated enterprise customers. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) to benchmark various international transactions undertaken by the assessee. As per TP study report, the assessee had entered into various international transactions which are enlisted at page 2 of TPO’s order totaling ₹ 27,72,10,120/-. The assessee had selected TNMM method as most appropriate method by taking itself as the tested party. The FAR analysis done by the assessee characterized as engineering and design service provider exposed to less than normal rates. The assessee in TP study report, internal segmentation was done at TNMM level and AE segment and non-AE segment adjusted profitability was worked out at 20.14% and 1.37%, respectively. The net margin was worked out on positive side as cost of ₹ 13 crores was left out from calculation in both the segments. In the TP study report, the assessee selected 16 external uncontrolled comparables whose mean margin worked out to 1.82% as compared to adjusted margin of AE segment of 20.1%. In conclusion, it was stated by the assessee that it had earned entity level adjusted margins of 14.02%, adjusted AE segment of 20.14% and adjusted non-AE segment of 1.37% as compared to weighted uncontrolled comparables of 7.25% and single year margin of 1.82% and hence, international transactions were at arm's length price. On 02.05.2012, revised Form No.3CEB audit report was filed before the TPO along with fresh letter of authority. The new 3CEB form contained the following transactions and details thereof, which read as under:-
4 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
Sr. Details of transaction Value of the Method No. Transaction Adopted 1 Procurement of IT Software 8,02,587 CUP 2 Engineering design Services 11,90,75,156 CUP 3 Other Services 65,77,285 CUP 4 Consultancy charges engineering services 20,59,547 CUP for projects and IT services 5 Microsoft License fees 20,59,548 CUP 6 IT Support (Connectivity charges) 37,22,710 CUP 7 Catia Licenses Fees 2,93,82,390 - 8 Sharing of Costs of SAP licenses 66,24,848 - 9 Reimbursement of Expenses 1,25,01,897 - Total 18,28,05,968
The assessee explained the switchover from TNMM method to CUP method on the basis of budgeted rate which was worked out from current TP audit. The assessee based on the estimation of cost had worked out the rates at 24 Euros per hour and during the TP audit, the assessee was asked to explain the cost components of budgeted rate which was not explained by the assessee before the TPO. During the course of TP proceedings, the TPO found that arm's length price determination on CUP suffered from several infirmities and hence, the assessee was issued show cause notice to explain as to why CUP method as most appropriate method should not be rejected. This premise was based on the fact that (1) there were differences in the functional and risk profile of the domestic and export segments; (2) both AE and non-AE segments had controlled transactions as part of cost. And (3) the CUP rates have been even worked out with the comment that “Budgeted overheads (including other costs and costs related to support services outsourced to AEs)”. The assessee was asked to explain the same. The rebuttal of assessee is summarized by the TPO under para 10 at pages 5 and 6 of TPO’s order. The TPO for reasons discussed in para 11 of the order under section 92CA(3) of the Act concluded that in the absence of availability of exact comparables, uncontrolled price was similar, products exported to its associated enterprises and non-associated enterprises, CUP method could not be applied for
5 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
transfer pricing exercise as the most appropriate method. The TPO thus, rejected use of CUP for benchmarking the transactions of ITES services to associated enterprises. We may refer to the observations of TPO in this regard in paras 11.11 to 11.20. The approach of TPO that both AE and non-AE segments had controlled costs and hence, were tainted was objected by the assessee by saying that most of the costs were third party costs. The TPO however, observed that domestic segment was having controlled transactions with its associated enterprises and accordingly, domestic segment which the assessee was proposing to be used as comparable was itself tainted for its controlled transaction, as per hour rate calculated in the TP audit. The TPO observed that benchmarking of margins earned by segment within business and both being controlled transactions, results in erroneous approach. The TPO also observed that the assessee was charging hourly rates to associated enterprises, but lump sum rates to non-associated enterprises; where non-associated enterprises projects were based on work progress and time schedule and fixed price contracts, whereas AE projects were charged at hourly rates. The TPO thus, concluded by saying that there seems to be no connection between the rates charged and the contracts awarded on the lump sum basis. Further, the TPO held that assertion of assessee that rate represents CUP was not correct and the same was rejected.
The assessee then, was asked to submit set of comparables for benchmarking arm's length price on TNMM basis. The assessee identified only one comparable i.e. Cades Digitech Pvt. Ltd. with negative margin of 13.72%. The TPO however, selected final set of comparables including Cades Digitech Pvt. Ltd. selected by the assessee. The other concerns selected to be functionally comparable were KLG Systel Ltd., Cosmic Global Ltd. and Genesys. The mean margins of said comparables worked out to 26.89%. The assessee company had
6 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
worked out its PLI at OP/TC in export segment at (-) 25.67%, as per profits split certified by a CA dated 30.10.2012. The TPO made an adjustment of ₹ 8,88,53,258/- to international transactions relating to provision of IT Enabled Services by the assessee to its associated enterprises. The Assessing Officer proposed the aforesaid upward adjustment, against which the assessee filed objections to the Dispute Resolution Panel (DRP), which rejected the objections of assessee and confirmed the proposed adjustment. The Assessing Officer thus, passed order under section 143(3) r.w.s. 144C of the Act and adjustment of ₹ 8.88 crores.
The assessee is in appeal against the aforesaid adjustments made in its hands by raising different aspects of the issue. The grievance of assessee is against the order of Assessing Officer/TPO/DRP in rejecting CUP method selected by the assessee as most appropriate method and determining arm's length price of international transactions by applying TNMM method as most appropriate method. The assessee is further aggrieved by selection of companies which were not functionally comparable and also by the order of authorities below in not allowing deduction of extraordinary cost in relation to under-utilization of capacity of man- hour and infrastructure and other extraordinary costs while computing operating margins of assessee.
The learned Authorized Representative for the assessee before us has made elaborate submissions with respect to scope of services provided to associated enterprises and to other domestic parties. The case of learned Authorized Representative for the assessee was that at best internal TNMM method or internal CUP method is to be applied, where the price realized from both associated enterprises and non-associated enterprises was reasonable, then the
7 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
profit rate also is to be accepted as reasonable. He also asked for adjustment on account of capacity utilization. The assessee is also aggrieved by rejection of carving out of profits undertaken by the assessee. The assessee had furnished segmental details before the TPO for benchmarking international transactions which were not accepted. In this regard, the assessee stressed that hourly rates which are worked out at 24 Euros should be applied. On without prejudice basis, the assessee raised objections against external comparables selected by TPO as being not functionally comparable. The learned Authorized Representative for the assessee also stressed that TPO was not correct in saying that the arrangement was cost plus; on the other hand, the assessee was charging hourly rates which were scientifically worked out.
The learned Departmental Representative for the Revenue referred to the changing stands of assessee i.e. in TP study report it had selected TNMM method and before the TPO, revised Form 3CEB was filed advocating application of internal CUP as the most appropriate method, wherein the hourly rates were worked out at 24 Euros. The first question which arises is that where the auditor had originally filed Form No.3CEB, can the same be revised? The learned Departmental Representative for the Revenue here placed reliance on the order of Tribunal in assessee’s own case relating to assessment year 2008-09, wherein the Tribunal had sent the issue back to the file of TPO/Assessing Officer because of varying stands of assessee. He then took us to FAR analysis which was referred to by TPO in paras 11 to 11.20, 12 to 12.3 and 13 and the final analysis in para 16 where the TPO had applied TNMM method.
The learned Authorized Representative for the assessee in rejoinder stressed that mandate of section 92(1) of the Act had to be achieved, so most
8 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
appropriate method had to be applied. He also pointed out that all the employees were mechanical engineers who were providing engineering design services to associated enterprises and all cost for IT services and also cost of IT services were reimbursed.
We have heard the rival contentions and perused the record. The issue which arises in the present appeal filed by the assessee is against transfer pricing adjustment made in engineering design services provided by the assessee to its associated enterprises. The assessee was also providing the said services to domestic and non-associated enterprises during the year under consideration. The case of assessee is that because of increase in assets and employees, who were also the asset of assessee, it was providing the engineering design services to domestic parties and also to associated enterprises and non-associated enterprises. The assessee has claimed that it was charging higher rates to associated enterprises than while providing domestic services. It may be pointed out that the year under consideration is the second year of operation of the assessee and in all the segments, the assessee has shown losses. The assessee had first selected TNMM method in its TP study report and filed audit report in Form No.3CEB in support thereof. Thereafter, during the course of TP proceedings on 02.05.2012 revised Form 3CEB was furnished, wherein the most appropriate method was applied to be internal CUP. The perusal of value of transactions in the two reports reflect that in the first report was totaling ₹ 27.72 crores, whereas in the second list it totaled to ₹ 18.28 crores. Without going into said aspect, the TPO took note of submissions of assessee on the change in the method to be applied to benchmark the arm's length price of transactions and after going through various submissions of assessee and various facets of case, the TPO held that external TNMM method is most appropriate method to be applied in the case of assessee.
9 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
The TPO asked the assessee to select comparables and the assessee selected only one comparable i.e. Cades Digitech Pvt. Ltd. The TPO however, selected four concerns as comparable and found that international transactions undertaken by the assessee were not at arm's length and proposed an adjustment of ₹ 8.88 crores. The Assessing Officer in the draft assessment order passed under section 143(3) r.w.s. 144C of the Act, dated 21.03.2013 noted the observations of TPO and vide para 13 made an adjustment of ₹ 8.88 crores to international transactions relating to provision of ITES services. The DRP rejected the submissions of assessee and the Assessing Officer passed final assessment order making an upward adjustment of ₹ 8.88 crores, against which the assessee is in appeal before us.
The year under appeal is the second year of assessment in the case of assessee. In the preceding year i.e. assessment year 2008-09, the issue of transfer pricing provisions arose before the Tribunal as to adoption of most appropriate method for benchmarking international transactions. The assessee in the said year also was changing its stand from stage to stage i.e. in the initial stage of filing the return of income, the assessee had applied CPM method as most appropriate method on the ground that it was having cost plus mark up. The TPO did not agree with the submissions of assessee and proposed to apply TNMM method. The assessee during the course of TP proceedings proposed a set of comparables, which according to it, were functionally similar and also pointed out that no adjustment is to be made on account of arm's length price of international transactions as the margins shown by the assessee were higher than the mean margins of comparables selected. The TPO made fresh search and selected other comparables and finally made an adjustment of ₹ 4.93 crores against export sales of ₹ 3.90 crores. Before the DRP in assessment year 2008-09, the assessee
10 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
furnished additional objections and evidences and pointed out that CUP method was appropriate method. The assessee furnishing pricing methodology adopted by it and also its business description and the DRP rejected the claim of assessee, since no such plea was raised before the TPO. The Tribunal while deciding the appeal of assessee observed that the proceedings before the DRP were continuation of assessment proceedings and any additional plea or evidence could be considered by the DRP as provided under section 144C(6) of the Act. The assessee in earlier year was aggrieved by the order of DRP in not applying CUP method as the most appropriate method for benchmarking international transactions. The assessee was also aggrieved by the application of TNMM method on an arbitrary basis; firstly, by not disclosing the basis for search and also for selecting certain companies which were not functionally comparable. Another objection which was raised was to carve out extraordinary cost for under-utilization of capacity.
By way of ground of appeal No.6, the assessee has raised another objection i.e. only segmental accounts of associated enterprises should be considered and after carving out, margins should be compared with non-associated enterprises. The plea of learned Authorized Representative for the assessee in assessment year 2008-09 was to apply internal CUP method as the most appropriate method and at best or in alternate, internal TNMM method may be applied. Since the assessee was changing its plea at each stage of proceedings, the learned Departmental Representative for the Revenue strongly objected to the same.
The Tribunal in such scenario held as under:- “22. In the entirety of the above facts and circumstances, where the assessee is changing its stand with regard to the application of most appropriate method from stage to stage i.e. from TP study report to proceedings before Assessing Officer
11 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
and DRP, even before us and in view of various cross pleadings raised by the assessee, we think it is a fit case to be sent back to the TPO in order to adjudicate the issue of application of the most appropriate method for benchmarking the international transaction undertaken by the assessee. The claim of the assessee before us is that internal CUP method is the most appropriate method irrespective of the fact that the quantum of domestic transactions were very low vis-à-vis the quantum of export sales made to its AEs. In this regard, reliance was placed on the ratio laid down by the Delhi Bench of Tribunal in Lummus Technology Heat Transfer BV Vs. DCIT (supra). Further, the learned Authorized Representative for the assessee has placed reliance on series of decisions, which we have referred to in the arguments of the learned Authorized Representative for the assessee, but are not deciding the applicability of the said decisions to the facts of the present case, in view of our setting aside the matter back to the file of TPO. The application of transfer pricing provisions has undergone development and in the interest of justice, we are of the view that this issue needs to be looked into de novo by the TPO / AO in order to correctly determine the arm's length price of international transaction entered into by the assessee. We are not adjudicating the issue as to which method is to be applied and the Assessing Officer is at liberty to decide the issue after giving reasonable opportunity of hearing to the assessee as to the most appropriate method for benchmarking international transaction and after considering the various aspects raised by the assessee with regard to the carving out the expenses on account of under-utilization of capacity and manpower. The Assessing Officer shall consider the various objections raised by the assessee before us before deciding the issue and the assessee is directed to put up its case before the Assessing Officer vis-à-vis its stand in respect of most appropriate method to be applied for determining the arm's length price of international transaction and the allied issues. Consequently, the issue raised by the assessee vide ground of appeal Nos.3 to 8 are sent back to the file of TPO / AO. Since we are remitting the issue back to the file of TPO / AO, we are not adjudicating the issue on merits. The grounds of appeal raised by the assessee are thus, allowed for statistical purposes.”
Now, coming to instant appeal before us also, the learned Authorized Representative for the assessee was specifically asked as to what is the method applied in assessment year 2008-09 by the Assessing Officer / TPO after the matter was set aside to them vide order dated 14.12.2015. The learned Authorized Representative for the assessee pointed out that no appeal effect has been given and the matter was pending. He then, stressed before us that in the year under appeal, the benchmarking is being done by applying man-hour rates which has been worked out as per revised form number. The man-hour rates worked out at 24 Euros which has been claimed in the revised form No.3CEB filed during the course of TP proceedings. It may be noted that the assessee in the year under consideration also, has been changing its stand i.e. in TP study report, TNMM
12 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
method was selected. However, before the TPO, the assessee pleaded that internal CUP method was the most appropriate method, wherein hourly rates charged to associated enterprises at 24 Euros be applied as against charges levied on non-associated enterprise charges. The TPO on the other hand, had applied TNMM method and had made comparison with external comparables in order to benchmark international transactions of the assessee. We are of the view that in order to benchmark international transactions undertaken by the assessee, the most appropriate method needs to be applied. The question is which is the most appropriate method? The assessee had selected TNMM method and then by way of revised form No.3CEB during TP proceedings has changed its stand to apply internal CUP of man hourly rates. In order to benchmark international transactions undertaken by the assessee, an endeavour should be made to apply the most appropriate method and the same may be what has been applied by the assessee in TP study report or as proposed in TP proceedings. The stand of assessee that it is providing services to its associated enterprises and charging hourly rates, which worked out to 24 Euros per hour as against charges raised against non-associated enterprises and domestic parties. The assessee is providing specialized services in the field of engineering design services and where similar services are being provided to the domestic and non-associated enterprises parties, the question which arises is can the same be compared especially where the costs are from the same source and hence, the transactions are tainted.
We have already taken a view in the case of DCIT Vs. Man Trucks India Pvt. Ltd. in ITA No.547/PUN/2014 and in appeal filed by assessee in ITA No.582/PUN/2014, relating to assessment year 2009-10, order dated 03.04.2018, where the costs are identical for providing services, then even if the costs borne for associated enterprises and non-associated enterprises or the domestic parties are
13 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
same, the same can be ignored in order to benchmark arm's length price of international transactions undertaken by the assessee. Accordingly, we find merit in the plea of assessee that hourly rates charged by it in providing specialized services to its associated enterprises can be the basis for verifying its stand as to whether the services provided by the assessee to its associated enterprises were at arm's length. However, the stand of Assessing Officer / TPO in rejecting the said plea of assessee was the tainted transactions vis-à-vis costs incurred by the assessee both for associated enterprises and non-associated enterprises. In the totality of the above said facts and circumstances, where the stand of assessee has not been looked into by the TPO and has been brushed aside, we in the interest of justice, direct the Assessing Officer / TPO to determine arm's length price of international transactions undertaken by the assessee by applying most appropriate method i.e. internal TNMM method of man hourly rates. The assessee has also asked for various other adjustments for carving out differences which may also be looked into by the TPO, who shall decide the issue after affording reasonable opportunity of hearing to the assessee and determine arm's length price of international transactions.
In the result, appeal of the assessee is allowed as indicated above.
Order pronounced on this 5th day of June, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 5th June, 2018. GCVSR
14 ITA No.314/PUN/2014 Magna Steyr India Pvt. Ltd.
आदेश की प्रयतलऱपप अग्रेपषत/Copy of the order is forwarded to : 1. The Appellant; 2. The Respondent; The DRP, Pune; 3. 4. The DIT (TP/IT), Pune; 5. The DR ‘A’, ITAT, Pune; 6. Guard file. आदेशािुसार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण, ऩुणे / ITAT, Pune