M/S EMERSON AUTOMATION SOLUTIONS INTELLIGENT PLATFORMS PVT. LTD,,BANGALORE vs. DCIT, C-3(1)(2), BANGALORE

During the relevant financial year, it was observed that the assessee had international transaction exceeding Rs. 15 crores. Therefore, with the prior approval of the Commissioner of Income-tax, Bangalore-I, Bangalore, a reference was made to the Transfer Pricing Officer to determine the Arms' Length Price as per provisions of Section 92CA of the 1.T. Act, 1961. This order u/s 92CA of the Income-tax Act, 1961 dated 31.10.2017 passed by the Asst. Commissioner of Income-tax (Transfer Pricing)-1(3)(1), Bangalore has been received in this office. This order passed by the Asst. Commissioner of Income-tax (Transfer Pricing)-1(3) (1), Bangalore has decided that adjustment to Arms Length Price to the extent of Rs.19,44,46,400/- is required to be made u/s 92CA of the I.T. Act, 1961.

Consequent to DRP's Direction, transfer Pricing officer-1(3)(1), Bangalore has passed the order u/s 92CA on 11.10.2018, and has concluded that an adjustment is required with regard to transfer pricing adjustment u/s 92CA:

In view of the above factual background, the assessee assailed the order of DRP / AO mainly on three segments a. Manufacturing of automation product b. Distribution of automation product c. Provisions of marketing support services.

In manufacturing automation segment, the main grievance of the assessee is with respect to the rejection of adjustment in support of custom duty paid by the assessee on the import of spare parts from its associated enterprises (AE). The relevant findings of the TPO with respect to the adjustment of custom duty are as under:- “7.11.6 Customs Duty Adjustment: In the assessee's case, operating cost of the tested party has been adjusted instead of that of comparable companies. This is in contradiction of the fundamental principles of making any adjustment under the transfer pricing analysis. Further the tax payer company has imported goods after payment of customs duty at a higher price than domestic goods, this decision has been taken by it consciously considering all the commercial considerations including the obvious benefits of better quality which is bound to reflect or translate into a higher selling price of the product which hardly leaves any scope for adjustment to the profit margin of the comparables on this issue. The above stand of revenue is upheld by the decision of the Hon'ble ITAT DELHI in the case of M/s Sony India Pvt. Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) in M/s Emerson Automation Solutions Intelligent Platforms P. Ltd. support of the proposition that Customs Duty Adjustment should not be allowed. The same is reproduced below for reference: As regards the taxpayer's claim for adjustment to the operating margins of the comparables on account of higher amount of custom duty paid on imported components viz-a- viz. the comparables, it is noticed that the working of such adjustment sought by the taxpayer is given on page Nos. 365 and 366 of the taxpayer's paper book. A perusal of the said working shows that it is mainly based on proportion of imported components and the duty paid on such imported components. In our opinion, this basis adopted by the taxpayer for seeking the adjustment on account of excess custom duty borne by it is not correct inasmuch as consideration of duty payment alone would not justify such adjustment and it would be necessary to take into account the cost of components imported along with the custom duty paid thereon for the purpose ofcomparison with the corresponding indigenous components consumed by the comparables Moreover, the local levies such as sales tax etc. are also required to be taken into account for such comparison. It is also pertinent to note here that if the taxpayer company has purchased the imported components after payment of custom duty at a higher price than the indigenous components purchased by the comparables, this decision must have been taken by it consciously taking into account all the commercial considerations including the obvious benefits of better quality which is bound to reflect or translate into a higher selling price of the product. This leaves hardly any scope for adjustment to the profit margins of the comparables on this count. Hence the taxpayer's claim of Customs Duty Adjustment for computation of profit margin is net accepted.”

Aggrieved with the order of the TPO, the assessee preferred its objections before the DRP and inter alia submitted as under: - “The Assessee would like to bring to the Learned Panel's notice that the Company relies on imported components for the production of finished goods. Majority of the raw material purchases is by way of import and only a certain consumables are procured locally. Hence GEIP incurs significant cost by way of customs duty. Whereas, in case of comparable companies, raw material purchases by way of import is much lower as compared to GEIP which pushes down their cost of production. Hence, a necessary adjustment has been undertaken to give effect to the excess customs duty incurred by GEIP. Accordingly, excess customs duty incurred amounting to INR 59,29,919 relative to comparable companies, has been excluded in computing the operating margins. The Assessee further submits that the ratio of imports to purchases of the Company in FY 2013- 14 is at 66.72 percent of the purchase. However, on review of the imports of the comparable companies it is seen that the average imports to purchases ratio is only 26.61 percent. Particulars Amount (INR) Total purchases of GEIP 54,38,78,670 Total imports of GEIP 36,28,70,345 Imports as % of total purchases for GEIP 66,72% Imports as % of total purchases for Comparables 26.61% Total Custom duty paid by GEIP (Manufacturing segment) 98,63,570 Customs duty payable at 26.61% import ratio (%) 39,33,650

Before DRP, the assessee has not raised specific ground vis-a- vis., the denial of custom duty adjustment as evident from grounds extracted by the DRP in its order at page no. 4. The findings of the ld. DRP are in para 2.3.1. The ld. DRP rejected the claim of the assessee for adjustment of custom duty.

Ld DR relied on the orders of authorities below.

After considering the rival submissions, we observe that synopsis filed by assessee would show that the arguments made by the assessee are too general and that too without the support of any material to refute the observations made by ld. TPO in its order. Further, the perusal of objections filed before the ld. DRP and extracted by us in above para would clearly demonstrate that before DRP also, the assessee has simply contended that the spare parts imported by it were having distinctive characteristics when compared to local spare parts available in India. The assessee has not filed any data, analysis to establish the distinctive features of the foreign spare parts with that of Indian local spares available in India. During the course of hearing, the Bench has raised the query from the assessee’s counsel as to whether any adjustment on this count has ever been allowed to the assessee in the previous or in future assessment year. In response to the query of the Bench, the assessee filed submissions on 28th August, 2024 and candidly accepted that the claim of the assessee for custom duty adjustment in manufacturing segment was not allowed by the Assessing Officer as well as appellate authorities in respect of previous years. Assessee has also pointed out that from A.Y. 2016-17 onwards, the assessee is not making any adjustment on this custom duty aspect in its TP documentation. Therefore, considering the totality of the facts and circumstances of the case, as well as the judgment of Sony India Pvt. Ltd. vs. DCIT (supra) as relied upon by the TPO, we dismiss this ground of appeal of the assessee. It is relevant to mention here that we have perused the case laws citied by the assessee, but the same were on different facts altogether.

Similarly, the contention of the assessee viz a viz adjustment of base cost in manufacturing segment is also rejected by the TPO affirmed by DRP and followed by AO. With respect to this adjustment also, the assessee has candidly accepted that no such adjustment has been allowed to the assessee in previous years by the assessing authorities or by the appellate authorities and the assessee himself has stopped claiming this adjustment from A.Y. 2016-17 onwards in its TP documentation. Therefore, we do not find any infirmity in the order of DRP / AO hence, this contention of the assessee is also de void of any merits.

One more fresh adjustment has been sought by the assessee by way of additional ground in relation to the grant of proportionate adjustment. The bone of contention of the assessee with respect to this adjustment is that the TPO has allowed this adjustment in A.Y. 2013-14 and hence the same may kindly be provided in this year also. The ld. AR has filed the copy of TPO’s order for A.Y. 2013-14 along with its synopsis marked as Annexure 2. We observed that from the order of TPO for A.Y. 2013-14 adjusted margin has been provided to the assessee for that year.It is settled law that each year under the Income Tax Act is a separate assessment year and principle of res judicata are not applicable to the income tax proceedings.However, there has to be consistency in the approach of Revenue and if some claim is accepted in previous year and there is no change in facts and circumstances of the case then it is to be applied for the subsequent year also. However, no such material / evidences has been placed before us on the basis of which we can conclude that the facts and circumstances of the impugned year are akin to the subsequent year i.e. A.Y. 2013-14. Therefore, in the interest of justice, we remit this issue to the file of TPO for deciding afresh in accordance with law. The other contention of the assessee in manufacturing segment was with respect to the adjustment of working capital. The assessee has raised this ground separately as ground no. 11, so we will deal with this ground separately. In manufacturing segment, the assessee has also sought relief on account of low margin deal as well as on account of forex loss. However, at the time of hearing, the learned counsel for the assessee fairly conceded these two adjustments hence, the same are dismissed. In view of the above discussion, ground no. 6 of the assessee is partly allowed for statistical purposes.

By virtue of ground no. 7, the assessee has mainly contended that the ld. TPO has erred in applying TNMM method instead of RPM method in the trading segment of the assessee. Facts with respect to this ground are like that the assessee as a part of distribution operations is purchasing and reselling automated control system from its AE as M/s Emerson Automation Solutions Intelligent Platforms P. Ltd. well as from non AE’s. It is also an admitted fact that goods purchased from AE and non AE are not similar. At the outset, learned counsel for the assessee submitted that the method adopted by assessee i.e. RPM to benchmark distribution segment as has been accepted by the Revenue in assessment year 2013-14. It is the submission of the assessee that the functions of the appellant vis-a-vis distribution segment is same as with A.Y. 2013-14. Therefore, on the basis of principle of consistency, the claim of the assessee may kindly be allowed.

Ld. DR placed reliance on the orders of the authorities below.

After considering rival submissions, we are of the view that this issue would also require fresh consideration at the end of TPO and in case the facts of the impugned year are akin to the facts of the A.Y. 2013-14 then applying the consistency principle, the TPO will decide the matter. During the course of hearing, the Bench has also raised a query as to whether the assessee has incurred expenses on advertising and packing of the material purchased for trading purposes. In response to the query of Bench, the assessee submitted that the appellant has incurred sales promotion and advertisement cost under the head ‘other expenses’ however, the value of these expenses is minimal amounting to Rs. 2,67,396/- only. We direct the TPO to give benefit of this fact to the assessee.

Therefore, ground no. 7 of the appellant is allowed for statistical purposes.

So far as the ground nos. 8 & 9 are concerned, the ld. AR has reiterated the synopsis filed before the Bench and the ld. DR relied upon the orders of the authorities below.

After considering the rival submissions, we are of the view that these grounds are related to trading and distribution segment. Since, we have already set aside the AMP expenses issue and the issue of applying the most appropriate method for benchmarking the trading segment transactions, to the file of the TPO, we direct the TPO to examine this contention of the assessee fresh, in accordance with law. Therefore, in the result, the ground nos. 8 and 9 are also allowed for statistical purposes.

After considering the rival submissions, we observe that the assessee is aggrieved by the computation of operating mark-up cost for companies while performing the comparability analysis. We are of the view that this ground is related to trading and distribution segment. Since, we have already set aside the other issues of trading segment to the file of the TPO, we direct the TPO to examine this contention of the assessee afresh, in accordance with law. Therefore, in the result, the ground no. 10 is also allowed for statistical purposes.

So far as the Ground No.11 is concerned, the contention of the assessee is that the TPO as well as DRP have erred in law in not granting working capital adjustment for manufacturing and trading segment. Ld. counsel for the assessee has argued that it is settled position of law that difference between the working capital of the tested party and of the comparables should be given credence while calculating Arm’s Length Price (ALP).

The ld. DR relied upon the orders of the authorities below.

After considering the rival submissions, we observed that the ld. TPO while discussing this issue at page no. 14 of its order in para 9.2 has observed that the taxpayer has not been able to demonstrate that the working capital difference has impacted the profits of the tested parties. Ld. TPO has also observed that the assessee failed to file any data to support the contention of working capital adjustment. We further observed that the ld. DRP in its order at page no. 13 in para 2.7.1 has principally accepted that Rule 10B provides reasonable accurate adjustment to eliminate the material effects of difference on the price cost or profits. However, failure of assessee to demonstrate the effect of working capital adjustment with appropriate data has forced the ld DRP to reject the claim of assessee. It is settled position of law that if there is huge difference in working capital of the comparableswith that to tested party. Then suitable adjustment is required to be made. However, since the assessee failed to provide any analytical approach before the lower authorities assessee could not get any relief. Before us the counsel of assessee strongly contended that assessee can prove with TP documentation and other material that there was huge difference in the working capital of the comparables and tested party. Therefore, in the interest of justice we remit this issue to the file of TPO for examining a fresh. We also direct assessee to provide all the necessary details / material in support of his contention.

In the result, the Ground No. 11 is allowed for statistical purposes.

Ground No 12 is specific ground for foreign exchange fluctuation loss. However, this ground has not been pressed by the assessee hence the same is liable to be dismissed as not pressed.

Ground Nos. 13 & 14 are with respect to the payments made to the headquarters in lieu of services received from the AE. In respect of this ground, the ld. counsel for the assessee has argued that the assessee has received following services from its AE, which are as under:- o Finance support services o HR support services o IT support services o Legal support services o Marketing support services o Product management support services; and o CEO support services.

For the above services, the assessee has paid an amount of Rs. 1,30,25,887/- for benchmarking this payment, the assessee has opted TNMM method. The method adopted by the assessee has been rejected by the TPO and the ld. TPO applied the CUP method.

The ld. DR argued that the assessee has failed to establish that it has received any services from its AE. The next averment of the ld. DR is that no benefit has been accrued to assessee from these services and hence the payments made to the AE are not allowable.

After considering the rival submissions, we observed that the argument of the ld. DR that the assessee has failed to obtain any benefit via rendering of these services by AE is not justifiable because it is settled position of law that for claiming of an expense, the incurring of expense as well as genuineness of expenses is to be seen nor the fruits ripped by the businessman on incurring of business expenses. It is equally settled position of law that the AO / TPO would not sit in the arm chair of a businessman as held by Hon'ble Supreme Court in the case of S.A. Builder 237 ITR Page 1. Therefore, we are of the view that this disallowance is not permissible hence, we allow the same. Further, we would like to rely upon the judgment of Hon'ble Delhi High Court in the case of HIV Communication

In result ground number 13 & 14 are allowed.

Ld. DR relied upon the orders of the authorities below.

After considering the rival submissions, we restore this issue to the file of TPO to examine as to whether the assessee has reversed these charges in subsequent year and has offered the same for taxation and then the TPO will decide the issue, in accordance with law.

In the result, the Ground Nos. 15 and 16 are allowed for statistical purposes.

Ground No.17 is akin to ground nos. 15 and 16 therefore our findings given in respect of Ground Nos. 15 and 16 would apply mutatis mutandis in respect of this ground.

In the result, ground number 13 & 14 of the assessee are allowed and rest of the grounds are allowed for statistical purposes.