Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “I”: NEW DELHI
Before: SHRI M BALAGANESH & SHRI VIMAL KUMAR
Assessee by: S/Shri Deepak Chopra and Ankur Goyal, Advs. (Virtual) Department by: Shri Dharm Veer Singh, CIT (DR) Date of Hearing: 31.07.2025 Date of pronouncement: 10.10.2025 O R D E R
PER VIMAL KUMAR, JUDICIAL MEMBER:
The assessee’s appeal is against Order dated 25.10.2018 of Learned Assessing Officer/Deputy Commissioner of Income Tax, Circle-2(1), Gurgaon (hereinafter referred as the “Ld.AO) under Sections 143(3)/144C of the Income Tax Act, 1961 (hereinafter referred as “the Act”) for assessment year 2014-15.
Brief facts of the case are that the assessee company filed return of income declaring total income as ‘Nil’ on 30.11.2014. The return was revised on 30.03.2016. The case was selected for ‘limited scrutiny’ through CASS.
Notice under Section 143(2) dated 31.08.2015 was issued. Notices under Section 142(1) of the Act along with questionnaire were issued on 10.06.2016 and 01.11.2017. Reference under Section 92CA(1) of the Act was made by the Ld. AO to the Ld. TPO, New Delhi for determining arm’s length price in respect of international transaction with associated enterprise at Rs.1,65,21,97,000/-. Ld. TPO passed order dated 30.10.2017 under Section 92CA(3) of the Act determining adjustment/difference on account of ALP in respect of international transaction. Ld. AO passed draft assessment order under Section 144C(1) of the Act proposing variation in income on 17.11.2017. The assessee raised objections against draft assessment order before Hon’ble DRP which were decided vide order dated 27.08.2018. In view of directions of Ld. DRP dated 27.08.2018 and Ld. TPO’s order dated 28.09.2018, Ld. AO made additions of Rs.55,10,67,832/- under Section 92CA(3) of the Act and addition of Rs.1,89,71,525/- on account of advertisement expenses vide order dated 25.10.2018.
Being aggrieved, appellant/assessee preferred present appeal with following grounds:
“A. TRANSFER PRICING GROUNDS: 1. On the facts and circumstances of the case and in law, the learned AO/TPO/ Hon'ble DRP erred in law and in facts by making an adjustment to the total income of the appellant of: a. INR 245,614,671 in respect of the international transactions (hereinafter referred to as "impugned transactions") entered into with its associated enterprises ("AEs"). b. INR 305,453,161 based on conjectures and surmises that installation and commissioning services provided by the appellant to its domestic third party customers falls within the ambit of Chapter X of the Income Tax Act, 1961 ("the Act").
2. On the facts and circumstances of the case and in law, the learned AO/TPΟ/Hon'ble DRP erred in law and facts by not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Indian Income Tax Rules, 1962 ("the Rules") and modifying the same for determination of arm's length price ("ALP") of the impugned transactions and holding that the same is not at arm's length.
3. On the facts and circumstances of the case and in law, the learned AΟ/ΤΡΟ Hon'ble DRP erred in law by not satisfying any of the conditions prescribed under section 92C(3) of the Act while proposing adjustments on account of various international transactions entered into by the appellant. I. SEGMENTAL FINANCIALS: 4. The Hon'ble DRP erred in not accepting the segmental profit and loss account which was duly certified by an independent cost account for benchmarking the international transactions of the appellant.
5. On facts and circumstance of the case, the learned TPO/AO/ Hon'ble DRP erred in rejecting the segmental financial accounts prepared by the appellant without appreciating that: a. The methodology adopted by the appellant for allocation of costs is in accordance with the functional, asset and risk profile of the respective business segments/ international transactions of the appellant; and b. The methodology adopted by the learned TPO/Hon'ble DRP for allocation of cost on the basis of turnover is flawed. II. INTEREST AS OPERATING EXPENSE
6. The learned AO/TPO/ Hon'ble DRP erred in law by disregarding the definition of operating expenses as provided under the Safe Harbour Rules and considering interest expense as operating in nature.
7. Without prejudice to ground of appeal
No. 6 above, the Hon'ble DRP further erred in facts by upholding the action of the learned TPO/AO of allocating interest expense solely to the business support services segment
8. Without prejudice to ground of appeal No. 6 and 7, the learned AO/TPO/ Hon'ble DRP also erred by following an inconsistent approach in the treatment of interest expense for computation of margins of the appellant and comparable companies. III. EQUIPMENT DISTRIBUTION SEGMENT
9. The learned AO/TPO/ Hon'ble DRP erred in law by not accepting the economic analysis undertaken by the appellant in connection with the international transaction pertaining to equipment distribution segment ("equipment distribution transaction") in accordance with the Act read with the Rules and modifying the same for determination of ALP of the said international transaction and incorrectly holding that the impugned transaction is not at arm's length.
10. The learned AO/ TPO/ Hon'ble DRP have erred, in law and on facts and circumstances of the case, by: a. Not accepting the use of multiple year data, as adopted by the appellant in TP documentation; and b. Determining the arm's length margins / prices using data pertaining only to Financial Year ("FY") 2013-14 which was not available to the appellant at the time of complying with the TP documentation requirements.
11. The learned AO/TPO/ Hon'ble DRP erred by adding Adtech Systems Limited to the final set of comparable companies for the aforesaid transaction on an ad-hoc basis, thereby resorting to cherry picking of comparables to determine ALP for the international transaction under consideration.
The learned AO/TPO erred in not excluding HCL Infosystems Limited from the final list of comparable companies on account of different financial year end as observed by the learned TPO in its order dated 28 September 2018.
13. Without prejudice to the above, the learned AO/TPO/ Hon'ble DRP erred by not appreciating the fact that the international transaction pertaining to import of equipment satisfies the arm's length principle even upon application of Resale Price Method ("RPM").
14. Without prejudice to the above, the learned AO/TPO/ Hon'ble DRP erred in not restricting the adjustment made to appellant's equipment distribution segment, to the value of international transactions with AE (i.e. value of the international transaction pertaining to import of goods during the subject FY)
IV. BUSINESS SUPPORT SERVICE SEGMENT (as redrawn by the learned TPO/Hon'ble DRP) 15. The Hon'ble DRP erred in concurring with the learned TPO's action based on conjectures and surmises of aggregating the installation and commissioning services (provided on principal to principal basis to third party Indian customers and not on behalf of related parties) with business support services provided to AEs without appreciating that these services are provided to third party customers in India and hence, not subject to transfer pricing provisions of the Act.
Without prejudice to the grounds of objection above, the learned AO/TPO/Hon'ble DRP erred in fact and in law by considering the mark- up earned by the appellant under the controlled scenario (i.e. provision of business support services to AE) as the arm's length margin thus violating the provisions of section 92C of the Act read with Rule 10B of the Rules.
17. Without prejudice to the grounds of objection above, the learned AO/TPO/ Hon'ble DRP failed to appreciate the fact that the appellant earned a higher mark-up of 19.91% from local segment (which includes revenue earned and corresponding costs incurred by the appellant in relation to installation and commissioning) as against the 14.5% mark-up proposed by the learned AO/TPO.
18. Without prejudice to the above, the learned AO/TPO/ Hon'ble DRP erred in not restricting the quantum of adjustment to value of international transactions of the appellant pertaining to the said segment. V. AVAILING OF TECHNICAL SERVICES 19. The Hon'ble DRP erred in facts and in law by upholding the action of the learned TPO of rejecting the economic analysis undertaken by the appellant, for determining the ALP of the international transaction pertaining to availing of technical services without assigning any reasons thereto in the impugned order. 20. The Hon'ble DRP erred in facts and in law by upholding the action of the learned TPO of determining the ALP as NIL by adopting a methodology which was in violation of provisions of section 92C(1) of the Act and rejecting the comparable uncontrolled price ("CUP") analysis undertaken by the appellant. 21. The learned TPO/AO/Hon'ble DRP erred, in law and facts and the circumstances of the case, by a. Challenging the business and the commercial expediency of the appellant for availing of technical services from its AE; and b. Concluding that appellant has not derived any benefits from availing such services from its AE. VI. REIMBURSEMENT OF EXPENSES 22. The Hon'ble DRP erred in upholding the action of the learned TPO of re-characterizing the international transaction pertaining to expenses recouped and charged to AEs (which is in the nature of recovery of service tax in relation to business support services provided to AE, recovery of penal damages from AE (on account of breach of contractual liability) and adjustment recharged to AE (on account of adjustment of monies owed by AE to third party customers in India) as facility/service provided to the AE and subsequently, imputing a mark-up on the same. 23. The Hon'ble DRP erred in upholding the action of the learned TPO of imputing a mark-up on the international transaction pertaining to expenses recouped and charged to AEs and not appreciating the fact that the said transaction, was undertaken merely for an administrative convenience and no services have been provided by the appellant to its AE in this regard.
The Hon'ble DRP erred in facts and in law by upholding the action of the learned TPO of determining the ALP by adopting a methodology which was in violation of provisions of section 92C(1) of the Act. B. CORPORATE TAX 25. The learned AO/Hon'ble DRP, has erred on the facts and circumstances of the case and in law, in disallowing 30% of the advertisement expenditure amounting to INR 1,89,71,525/- on adhoc basis by alleging that the same is capital in nature and further that these expenses result in enhancing the brand name of Huawei group. 26. Without prejudice to the grounds of objection above, the learned AO/TP/Hon'ble DRP erred in not appreciating the fact that that advertisement expenses disallowed by the learned assessing officer have been remunerated by its AEs on a cost plus mark-up basis as per the terms of the business support service agreement, and therefore any disallowance of such costs shall result in decrease in corresponding- revenue of the appellant. 27. Without prejudice to the above, learned AO/Hon'ble DRP has erred in law and facts and the circumstances of the case in not allowing depreciation on the amount disallowed allegedly treated as capital in nature. Without prejudice to the above, Learned AO/DRP has erred in law and facts and the circumstances of the case in not allowing depreciation on the amount disallowed allegedly treated as capital in nature. 28. The learned AO/Hon'ble DRP has erred in not providing deduction in respect of provision for customer claims utilized during the subject year, out of the amount disallowed in the assessment orders passed for AY 2012-13 and AY 2013-14, thereby leading to permanent disallowance of business expenditure in the year of creation as well as utilization of provision.” 4. Learned Authorized Representative for the appellant/assessee submitted that ground of appeal nos.1 to 3 are general in nature.
Learned Authorized Representative for the appellant/assessee submitted regarding ground of appeal no.4 including additional grounds of appeal and ground of appeal no.5 qua rejection of the segmental financials prepared by the assessee submitted that Ld. TPO erred in rejecting the segmental financials prepared by the appellant in accordance with the function, asset and risk (‘FAR’) , profile of each business segment of the appellant and arbitrarily allocated the cast on basis of operating revenue. The Hon'ble tribunal in the case of Wilhemsen Ship Management (India) Private Limited v. The Asst. CIT (Refer para 12 page 12 of the convenience paperbook) accepted the use of certified segmental financials. Although, the Hon'ble DRP did not provide any clear directions on acceptance of segmental financials submitted by the appellant but while passing the rectified directions (Refer rectified DRP directions p.g. 520 read with appellant's submission 492-493 of the paper book) for the BSS segment; considered the calculation flowing from the said segmental financial. Hence, it may be inferred that the Hon'ble DRP agreed with the approach adopted by the appellant in the certified segmental financials. Accordingly, certified segmental financials should be considered while computing the margin of equipment distribution segment.
Learned Authorized Representative for the appellant/assessee regarding grounds of appeal nos.6 to 8 submitted that Hon’ble DRP upheld action of Ld. TPO and considered interest as non-operating item. Interest expense is operating in nature and working capital loan has been availed for providing services to AEs under the business support services segment as re-drawn by the Ld. TPO. Interest expense should be treated as non-operating in nature as it does not relate to the routine business operation of the appellant. For this reliance can be placed upon the following:
i) Definition of operating expense as provided in Safe Harbour Rules (Rule 10TA of Indian Income Tax Rules, 1962 ("the Rules")) (Refer para (j) page 18-19 of the convenience paper book); ii) Organization for Economic Cooperation and Development ("OECD") TP guidelines, 2017 (Refer para 2.86 page 20 of the convenience paper book) iii) United Nations TP Manual, 2017 (Refer page 21 and 22 of the convenience paper book) iv) Sumitomo Corporation India (P.) Ltd. v. DCIT, [ITA NOS. 2307 (DELHI) OF 2009 & 6719 (DELHI) OF 2013]; (Refer para 5.3 page 29 and 30 of the convenience paperbook) v) Marubeni India (P.) Ltd. vs ACIT [ITA NOS. 809 & 935 (DELHI) OF 2009] (Refer page 61 and 62 of the convenience paperbook) vi) Marubeni India Pvt. Ltd. (ITA 1042/2011) vs DIT- Jurisdictional Delhi High Court (Refer page 93 of the convenience paperbook); and vii)Techbooks International Pvt. Ltd., vs. DCIT (ITA No.240/Del/2015) (Refer paras 5.2 page 114-115 of the convenience paperbook) 6.1 Action of the Ld. TPO of allocating interest expense to BSS segment lack cogent reasoning. Under this segment, the appellant renders services to its AEs on a cost + mark-up basis and the receivables are collected in a timely manner therefore, the appellant does not require loan for this segment. Ld. TPO rejected the segmental financials as Equipment distribution segment.
Learned Authorized Representative for the appellant/assessee regarding Equipment Distribution Segment dealt by grounds of appeal nos. 9 to 14 submitted that the equipment distribution segment Method applied:
Transactional Net Margin Method (“TNMM”) Appellants margin: 11.95% (as per segmental financial prepared in accordance with the FAR profile of this segment). Arm’s length price (“ALP”): 1.71%, Rejection of economic analysis of the appellant.
7.1 Ld. TPO rejected the segmental financials as provided in the TP documentation on the basis that the approach of the appellant to solely allocate COGS to this segment was incorrect and in essence the appellant had applied RPM instead of TNMM (Refer TPO order p.g. 243 of the appeal set). Ld. TPO rejected certain comparables selected by the appellant and added certain comparables on an ad-hoc basis.
7.2 A consistent approach should be adopted in terms of calculation of segmental financials of all segments. Accordingly, the margin of this segment should be computed basis segmental financials duly certified by a cost accountant wherein cost has allocated to this segment on the basis of headcount. In this regard, reliance is placed on the Jurisdictional HC ruling of CIT vs. EHPT India P Limited (ITA 1194/2008).
7.3 The appellant's arguments in relation to comparable companies are as under:
(a) Adtech Systems Limited should be excluded on of functional dissimilarity. Adtech is an electronic system integrator and provides a wide range of solutions in electronic security systems with a pan India presence. (b)HCL Infosystems Limited should be excluded from the final list of the comparables companies on account of different financial year end i.e. July to June. Reliance is placed on the following judicial precedents: i) Asstt. CIT v. Hapag Lloyd Global Service P. Ltd. [TS-47- ITAT-2013(Mum)-TP] (Refer para 7 page 180-181 of the convenience paperbook) ii) The Dy. Commissioner of Income Tax v. Ocwen Financial Solutions Pvt Ltd [TS-350-ITAT-2018(PUN)-TP] (Refer para 8 page 168 of the convenience paperbook) iii) Commissioner of Income Tax-II, Pune v. PTC Software (I) Pvt. Ltd. [TS-835-HC-2016(BOM)-TP] 7.4 Ld. TPO has observed that the appellant in the TP documentation had in essence computed the margin of Huawei India in accordance with RPM. The international transaction pertaining to import of equipment satisfies the arm's length principle even upon application of RPM 7.5 The adjustment (if any) should be restricted to the value of international transaction (i.e. cost of goods sold which constitutes 60.23% of the total operating cost). In the case of Keihin Panalfa Ltd. (ITA 11/2015 and 12/2015) (Refer para 12 page 191 of the convenience paper book). The Delhi HC ruled that transfer pricing adjustment (if any) should only be attributed to the quantum of international transactions and not the entire cost base of the taxpayer. Further, reliance may be placed on the following rulings:
(a) Commissioner of Income Tax vs M/s Tara Jewels Exports Pvt. Ltd. ( of 2013) (Refer para 6 pages 196-197 of the convenience paper books).
(b)IL Jin Electronics India Private Limited v. ACIT 05(2010) 36 SOT 227 (Refer para 15 page 205 of the convenience paperbook) (c)Emersons Process Management India P td (ITA NO 8118/M/2010) (AY-2006-07) (Refer para 19 page 222 of the convenience paperbook) (d)Kyungshin Industrial Motherson Limited v. DCIT (I.T.A No. 1396(Del)/2009).
Learned Authorized Representative for appellant/assessee qua Business Support Services segment raised in grounds of appeal nos. 15 to 18, submitted that method applied: Transactional Net Margin at 14.50% (as per segmental financial prepared in accordance with FAR profile of this segment), ALP: 10.42%. Segmental financials duly certified by a cost accountant should have been considered. Interest expense should be considered as non-operating in nature (detailed arguments provided above). The appellant earned a higher mark-up of 19.91% (Refer TP documentation p.g. 149 of the paper book) from local segment (which includes revenue earned and corresponding costs incurred by the appellant in relation to installation and commissioning) as against the 14.5% arm's length price determined by the Ld. TPO/Hon'ble DRP for the BSS segment (Refer TPO order p.g. 261 of the paper book).
Learned Authorized Representative for appellant/assessee qua Availing of technical support service with regard to grounds of appeal nos. 19 to 21, submitted that Hon'ble ITAT in appellant's own case for AY 2012-13 and AY 2013-14 held that the appellant had reproduced substantial documentary evidence to substantiate receipt of services. Also, it was held that the Ld. TPO cannot challenge/ question the commercial expedience of the appellant. The matter has been remanded back to the file of the TPO for fresh analysis. Reliance is placed on the following Delhi High Court ruling of judicial precedents:
i) CIT vs. EKL Appliances Ltd [I.T.A. Nos. 1068/2011 & Ι.Τ.A. Nos. 1070 / 2011], (Delhi High Court) (Refer para 21-24 page 261-264 of the convenience paperbook) ii) Cushman and Wakefield India Private Limited (ITA 475/2012) (Delhi High Court).
Learned Authorized Representative for the appellant/assessee qua Reimbursement of expenses received pointed out in ground nos. 22, 23 and 24 submitted that Ld. TPO re-characterized the transaction of recovery of expenses as services provided by the appellant to its AEs. Accordingly, imputed a markup of 5% on net recovery of expenses ( i.e. recovery of expenses ) (Refer TPO’s order p.g. 263-265 of the appeal set).
10.1 The transaction of reimbursement of expenses received has never been challenged by the revenue in previous years accordingly, following the principle of res-judicata the adjustment should be deleted. These expenses have been recovered on a cost to cost basis and there is no service element (Refer p.g. 162 of appeal set) Refer Annexure 1 for nature of expenses. Re-characterization of transaction is bad in law. No method prescribed in the Act was selected by the 13 TPO for determining the ALP of the captioned transaction The ALP of 5 percent determined by the TPO is on an adhoc and supported by any comparable uncontrolled transaction. It is pertinent to note that the Ld. TPO, from a flip side perspective, generally alleges that the services availed by Indian taxpayer from the overseas AE are shareholder activities and tend to determine the ALP as NIL, let alone the reimbursement on a cost-to-cost basis. However, in the present appeal, the Ld. TPO has failed to consider the nature of expenses and re-characterized the transaction of recovery as services and imputed an ad hoc mark-up thereon.
Learned Authorized Representative for appellant/assessee regarding ground nos. 25 to 27, submitted that disallowance of 30% of advertisement expenditure towards public relation service, promotion activities, commercial advertisement, sponsorship, print media, media monitoring and analysis etc. whilst treating the same as capital expenditure.
11.1 Issue is covered in favour of the Appellant in its own case for AY 2012- 13 and AY 2013-14.
11.2 The test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income Tax Department. (Refer Form 35A p.g.
211-217 of appeal set / PDF File Page 209-215 of appeal set) (Bifurcation of Advertisement Expenses - Page 449-450 of paperbook/PDF File Page 451-452 of paperbook). Reliance was placed on as under:
(i) CIT v. Walchand & Co. (1967) 3 SCR 214 (Refer Page 309 of convenience paperbook) (ii) J.K. Woollen Manufacturers v. CIT (1969) 1 SCR 525 (Refer Page 313-314 of convenience paperbook) (iii) CIT v. Panipat Woollen & General Mills Co. Ltd. (1976) 2 SCC 5 (Page 324 and 326 of convenience paperbook) (iv) Shahzada Nand & Sons v. CIT (1977) 3 SCC 432 (Page 334 of convenience paperbook) (v) S.A. Builders Ltd. v. CIT (2007) 1 SCC 781 (Page 340-341 of convenience paperbook) (vi) Hero Cycles (P) Ltd. v. CIT (2015) 16 SCC 359 (Page 347 of convenience paperbook) (vii) Shiv Raj Gupta v. CIT, Civil Appeal No. 12044/2016, judgement dated 22.07.2020 (Supreme Court) (Page 358 of convenience paperbook) (viii) Ad hoc disallowance of expenditure on account of incidental third party benefit is impermissible (ix) CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) (Page 367 of convenience paperbook) (x) Sassoon J. David & Co. (P.) Ltd. v. CIT (118 ITR 261) (SC) (Page 379 of convenience paperbook) (xi) CIT v. Adidas India Marketing (P.) Ltd. (2010) 195 taxman 256 (Delhi) (Page 382-383 of convenience paperbook) (xii) CIT v. Agra Bevrages Corporation (P.) Ltd. (2011) 11 taxmann.com 350 (Delhi) (Page 388 of convenience paperbook)
(xiii) CIT v. Modi Revlon (P.) Ltd. (2012) 26 taxmann.com 133 (Delhi) (Page 403 of convenience paperbook) (xiv) PCIT v. Merck Ltd. (2020) 120 taxmann.com 361 (Bom.) (Page 410-411 of convenience paperbook) (xv) Nestle India Ltd. v. DCIT [2009] 27 SOT 9 (Delhi) (URO) (Page 427 of convenience paperbook) (xvi) Advertisement expenditure incurred regularly are revenue in nature and not capital 12. Learned Authorized Representative for appellant/assessee did not press ground of appeal no.28.
Learned Authorized Representative for Revenue submitted that Ld. TPO in para 34 on page 241 of paper books, analyzed four types of nature of transaction of the assessee. TNMM was taken qua three types of transactions (i.e. Provision of business Support Services, Purchase of traded goods and Purchase of raw-material, traded goods and goods purchased on trial related to telecom equipment) and CUP method regarding Availing of Technical Services. Ld. TPO in para 35 summarized the segmental accounts submitted by the assessee. Finance cost not attributed to any segment was found. Therefore, Ld. TPO recasted BSS & local segment by considering OP/TC as arm’s length mark up. Business Support Services were regarding the assessee working foreign PE. Section 91.(1)b provides that agreement/arrangement need not be in writing. In para no. 53 under the head ‘Business Support Services after Sales Equipment”, Ld. TPO observed that “whether the finance expenses should also be included as a part of cost base as by assessee’s own admission, the finance 16 expense relate to short term unsecured Indian Rupee loan taken from Indian banks for meeting working capital requirements and the loans are covered under corporate guarantee/letters of comfort by the AEs of assessed”.
13.1 As per Assessee and AE agreement, the services were provided by the assessee regarding availing of technical support and findings performed thereunder.
13.2 Hon’ble High Court of Delhi in CIT vs. EKL Appliances Ltd. [2012] 24 taxmann.com 199 (Del.) in para nos. 16 to 18 are held under:
“16. The Organization for Economic Co-operation and Development („OECD‟, for short) has laid down "transfer pricing guidelines" for Multi- National Enterprises and Tax Administrations. These guidelines give an introduction to the arm‟s length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm‟s length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm‟s length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are re-produced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re- characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." 18
17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re- structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured.
18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner”. 13.3 Ld. TPO considering letter of comforts to trade payable, the trade and other receivable on short term dealings held that interest has to be spread over. Additional evidence of cost accountant cannot be relied. Finance Cost & non- operating costs are irrelevant. The Allocation of Expenses, Ld. TPO allocated finance cost to the others. TP Study Report in para 6.1.1.2 on page no.85 of paper books Volume-I mentions Functions performed by Huawei India with bullet points on page no.86. Interest is required to be made in PLI in view of TNMM Method. TP Study Report Volume 1 on page 149 deals with Segmented Financial Information “i.e. Imported Equipment, BSS, Factory & Local”. The inventory is being maintained by the assessee. Ld. TPO considered all the aspects and views taken in the earlier years regarding providing of Intra Group Services and Reimbursement of Expenses etc.
From examination of record in light of aforesaid rival contentions, it is crystal clear that grounds of appeal nos.1 to 3 are general in nature.
Ground of appeal no. 4 and additional ground of appeal as well as ground of appeal no.5 are regarding the rejection of segmental financials prepared by assessee in accordance with the functions, assets and risk (FAR), profile of each business segment of assessee by the Ld. TPO and arbitrarily allocating the cost on basis of operating revenue. Hon’ble DRP did not provide any clear directions on acceptance of segmental financials submitted by the appellant but while passing the rectified directions for BSS Segment, considered the calculation flowing from said segment. As such, certified segmental financials had to be considered while computing the margin of equipment distribution segment by the Ld. TPO. Therefore, the action of Ld. TPO in rejecting segmental financials prepared by the assessee being illegal is set aside. Accordingly, ground of appeal nos. 4 with additional ground of appeal and ground of appeal no.5 are allowed.
15.1 Ground of appeal nos. 6 to 8 are qua disregarding of definition of operating expenses as provided under the Safe Harbour Rules and considering interest expenses as operating in nature. Ld. TPO allocated interest expenses to business support segment without cogent reason. Appellant/assessee is rendering services to AEs on a cost plus markup basis and the receivables are collected in a timely manner. Ld. TPO rejected segmental finances as Equipment Distribution Segments.
15.2 A Co-ordinate Bench in Sumitomo Corporation India Ltd. Vs. DCIT in para no. 5.3 has held as under:
“5.3. Excess of operating revenues over operating expenses derived from the core business operations is called operating income. It represents income from ordinary business activities, and excludes expenses, such as interest, taxes and those of nonrecurring nature. In accountancy jargon, operating profit is synonym for Earnings before interest and taxes (EBIT). All costs associated with financing activities are excluded. Not only interest outgo is not operating expense, the amount of interest income is also not operating income, unless the assessee is engaged in the business of financing activity. Albeit the interest expense is incurred for the purpose of business (other than financing) and is also an allowable deduction against the business income, but the same does not assume the character of operating expense as it is not concerned with the operations of the hub activity of business. The same logic applies to the interest income which is also considered as non-operating revenue unless the business is that of financing. The crux is that not only interest income is construed as non-operating, but interest expenditure is also considered as non-operating. Thus both the interest expense as well interest income are required to be eliminated from the purview of operating cost and operating revenue to find out the net operating profit”. 15.3 In view of above material facts and well settled principles of law, it is held that the action of Ld. TPO is illegal and set aside. Accordingly, ground of appeal nos.6 to 8 are allowed.
16. Grounds of appeal nos. 9 to 14, are regarding equipment distribution segment. Ld. AO and Ld. DRP erred in not accepting the economic analysis undertaken by assessee in connection with international transaction pertaining to equipment distribution segment in accordance with the Act/Rules and modifying the same for determination of ALP of the said international transaction incorrectly holding that the impugned transaction is not at arm’s length. Ld. TPO erred in not accepting the use of multiple year data adopted by the ae in T.P. documentation and determining arm’s length margin margin/using data only of financial year of 2013-14 which was not available to the assessee. Ld. TPO erred in adding Ad Tech System Ltd. to the financial list. There was functional dissimilarities between assessee and Adtech System Ltd. and HCL Infosystems Ltd. Adtech System Limited should be excluded from the financial of comparables on account of different financial year. Ld. TPO erred in not appreciating the fact that the international transaction pertaining to import of equipment satisfies the arm’s length principles even upon application of RPM. The adjustment should have been restricted to the value of international transaction i.e. the cost of goods sold which constitutes 60.23% of the total operating cost. It is well settled principle of law that transfer pricing adjustment, if any, should only be attributed to the equipment of international transaction and not the entire cost basis of the tax payer. Reliance can be placed on judgment in CIT Vs. M/s. Tara Jewels Exports Pvt. Ltd. Vs. ACIT ( of 2013), cited supra. Therefore, action of Ld. AO being unsustainable in law is set aside. Accordingly, ground of appeal nos. 9 to14 are allowed.
Grounds of appeal nos. 15 to 18, are regarding Business Support Service Segment, as redrawn by the Ld. TPO/Hon’ble DRP. Business support services segment, method applied: Transactional Net Margin at 14.50% (as per segmental financial prepared in accordance with FAR profile of this segment), ALP: 10.42%. The Ld. TPO did not question the nature of services provided and the mark-up earned under this segment but alleged that the services provided by appellant to third party customers under local segment was in relation to equipment sold by its AEs to third party customers in India. Thus, aggregated BSS segment with local segment. Subsequently, the Ld. TPO allocated 50% of services revenue of the local segment to the modified BSS segment (Refer TPO order p.g. 231,254, 258-261 of the appeal set). The Ld. ΤΡΟ while constructing the BSS segment allocated COGS to this segment. Considered interest expense as operating and allocated the same to only BSS segment as redrawn by the TPO. (Refer TPO order p.g. 261 of the appeal set). As per appellant/assessed, the segmental financials duly certified by a cost accountant should be considered. Interest expense should be considered as non- operating in nature (detailed arguments provided above) and the appellant earned a higher mark-up of 19.91% (Refer TP documentation p.g. 149 of the paper book) from local segment (which includes revenue earned and corresponding costs incurred by the appellant in relation to installation and commissioning) as against the 14.5% arm's length price determined by the Ld. TPO/Hon'ble DRP for the BSS segment (Refer TPO order p.g. 261 of the paper 23 book). In view of above facts and judicial precedents, it is held that the action of Ld. TPO is illegal and set aside. Accordingly, grounds of appeal nos. 15 to 18 are allowed.
Qua Availing of technical support service with regard to grounds of appeal nos. 19 to 21, Hon'ble ITAT in appellant's own case for AY 2012-13 and AY 2013-14 held that the appellant had reproduced substantial documentary evidence to substantiate receipt of services. Also, it was held that the Ld. TPO cannot challenge/ question the commercial expedience of the appellant. Therefore, the matter has been remanded back to the file of the TPO for fresh analysis. In view of above material facts, the grounds of appeal nos. 19 to 21 are allowed in above terms.
Regarding reimbursement of expenses received is pointed out in ground of appeal
nos. 22 to 24. Ld. TPO re-characterized the transaction of recovery of expenses as services provided by the appellant to its AEs. Accordingly, imputed a markup of 5% on net recovery of expenses ( i.e. recovery of expenses ) (Refer TPO’s order p.g. 263-265 of the appeal set). The transaction of reimbursement of expenses received has never been challenged by the revenue in previous years accordingly, following the principle of res-judicata the adjustment should be deleted. These expenses have been recovered on a cost to cost basis and there is no service element (Refer p.g. 162 of appeal set) Refer Annexure 1 for nature of expenses. Re-characterization of transaction is bad in law. No method prescribed in the Act was selected by the TPO for determining the ALP of the captioned transaction. The ALP of 5 percent determined by the TPO is on an adhoc and supported by any comparable uncontrolled transaction. Ld. TPO has failed to consider the nature of expenses and re-characterized the transaction of recovery as services and imputed an ad hoc mark-up thereon. Therefore, the action of Ld. TPO is set aside. Accordingly, grounds of appeal nos. 22 to 24 are allowed.
Ground of appeal nos. 25 to 27 are regarding disallowance of 30% of advertisement expenditure towards public relation service, promotion activities, commercial advertisement, sponsorship, print media, media monitoring and analysis etc. whilst treating the same as capital expenditure. Issue is covered in favour of the Appellant in its own case for AY 2012-13 and AY 2013-14. The test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income Tax Department. (Refer Form 35A p.g. 211-217 of appeal set / PDF File Page 209-215 of appeal set) (Bifurcation of Advertisement Expenses - Page 449-450 of paperbook/PDF File Page 451-452 of paperbook). In view of above material facts, the action of Ld. TPO being unsustainable is set aside. The grounds of appeal nos. 25 to 27 are allowed.
Ground of appeal no.28 is dismissed being not pressed.
In the result, the appeal of assessee is allowed. Order pronounced in the open court on 10th October, 2025.