INGERSOLL - RAND (INDIA) LIMITED,BANGALORE vs. ACIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ A ” BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.(T.P) A. No.1529/Bang/2010 (Assessment Year : 2006-07) M/s. Ingersoll-Rand (India) Limited, Vs. Asst. Commissioner of Income Tax, Plot No.35, KIADB Indl. Area, Circle 11(4), Banglaore. Bidadi, Bangalore-562 109 Appellant Respondent.

Appellant By : Shri K.R. Vasudevan, Advocate. Respondent By : Shri C.H.Sundar Rao, CIT-I (D.R) Date of Hearing : 25.02.2015. Date of Pronouncement : 24.04.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of assessment for Assessment Year 2006-07 passed under Section 143(3) rws 144C of the Income Tax Act, 1961 (herein after referred to as 'the Act') vide order dt.25.10.2010, in pursuance of and in conformity with the directions of the Dispute Resolution Panel, Bangalore (‘DRP’) issued under Section 144C(5) rws 144C(8) of the Act vide order dt.28.9.2010. 2. The facts of the case, briefly, are as under :- 2.1 The assessee, a company engaged in the business of manufacturing and/or trading in air compressors, feeder crushers, loaders, vibratory compactors, light towers, utility vehicles and pavers, filed its return of income on 21.11.2006 declaring total income of

2 IT (T.P) A No.1529/Bang/2010 Rs.47,43,31,466. Subsequently, the assessee filed a revised return of income on 7.2.2008 returning the same income of Rs.47,43,31,466 as originally returned, but revised its claim for TDS from Rs.1,68,88,845 in the original return, to Rs.2,48,77,109 in the revised return. In the assessment year under consideration, the assessee primarily operated its business in two segments; (i) Air Solution Segment manufacturing air compressors and (ii) Infrastructure segment manufacturing mining and compaction equipments. The Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer (‘TPO’) for determination of the Arm’s Length Price (‘ALP’) of the international transactions reported by the assessee in the period relevant to Assessment Year 2006-07 after obtaining the approval of the CIT-I, Bangalore. The TPO passed the order under Section 92CA of the Act vide order dt.28.10.2009 proposing on T.P. Adjustment of Rs.34,40,77,835 which comprised of the following :- i) Adjustment to the manufacturing segment : Rs.33,58,49,835. ii) Adjustment towards interest on debts outstanding : Rs.56,28,000. 2.2 Subsequent to the receipt of the TPO’s order under Section 92CA of the Act dt.28.10.2009, the Assessing Officer passed a draft order of assessment dt.30.12.2009 determining the income of the assessee at Rs.81,84,09,305, which included the proposed T.P. Adjustment of Rs.34,40,77,835. 2.3 Aggrieved by the draft order of assessment for Assessment Year 2006-07 dt.30.12.2009, the assessee filed its objections thereto before the DRP. The assessee also preferred an application under Section 154 of the Act before the TPO vide letter

3 IT (T.P) A No.1529/Bang/2010 dt.2.2.2010. The TPO passed an order under Section 92CA(5) rws 154 of the Act dt.29.6.2010 wherein the T.P. Adjustment was revised to Rs.11,84,66,758; the break up of which is as under :- i) Adjustment to the manufacturing segment : Rs.11,28,38,758. and ii) Adjustment towards interest on debts outstanding : Rs.56,28,000. In the course of proceedings before the DRP, the assessee furnished the order of the TPO passed under Section 154 of the Act on 2.2.2010 which the DRP took note of. The DRP issued its directions under Section 144C(5) rws 144C(8) of the Act vide order dt.28.9.2010 thereby confirming the adjustment made by the TPO to the extent of Rs.11,84,66,758 and dismissed all the contentions raised by the assessee. 2.4 On receipt of the directions of the DRP vide its order dt.28.9.2010, the Assessing Officer passed the final order of assessment for Assessment Year 2006-07 under Section 143(3) rws 144C of the Act vide order dt.25.10.2010 wherein the income of the assessee was determined at Rs.59,10,63,612 which included the T.P. Adjustment of Rs.11,84,66,758. 3. Aggrieved by the final order of assessment for Assessment Year 2006-07 dt.25.10.2010, the assessee is now in appeal before the Tribunal assailing the T.P. Adjustments made, both in respect of manufacturing sector and also towards interest on outstanding debts. The grounds raised are as under :- “ Ground No. 1: The learned AO has erred in law and on facts, in upholding the adjustment to the transfer price proposed by the learned TPO.

4 IT (T.P) A No.1529/Bang/2010 Ground No. 2: The learned AO/DRP/TPO have erred in law and on facts by rejecting Transfer Pricing documents of appellant which were prepared by the appellant in the manner as contemplated under the provisions of the Act and Income-tax Rules, 1962. The Honourable DRP and the learned AO should have appreciated the fact that the appellant has conducted an exhaustive and elaborate benchmarking analysis, to arrive at a set of companies that are broadly comparable with the appellant in respect of functions performed, assets employed and risks assumed, and benchmarked the average net margins earned by the independent comparables with the net margins earned by the appellant. Error in arriving at the International Transactions of the Infrastructure Segment: Ground No. 3 (i): The Honourable DRP and the learned AO have erroneously erred in arriving at the value of the sale made by the Infrastructure segment to the Associated Enterprises. Ground No. 3 ii): The Honourable DRP and the learned AO ought to have appreciated the fact that even after accepting the international transactions pertaining to the Air Solutions Segment to be at arm’s length, it was erroneous on the part of the learned TPO to have included the aggregate value of the international transactions entered into by the Air Solutions segment instead restricting himself only to the international transactions entered into by the Infrastructure segment of the business. Ground No. 3 (iii): The Honourable DRP and the learned AO have erroneously erred in not appreciating the fact that the learned TPO has included a sum of `845,033,854 pertaining to the sale of finished goods by the Air Solutions segment as part of the sale of goods made by the Infrastructure segment. The aggregate revenues derived by the Infrastructure segment with reference to the international transactions entered into with the AEs amounts to `88,180,275 Ground No. 3 (iv): The Honourable DRP and the learned AO have erroneously erred in not appreciating the fact that the learned TPO completely ignored the fact that not only the products sold by the two segments are completely different, but they cater to a different clientele base. Ground No. 4(i): The Honourable DRP and the learned AO ought to have appreciated the fact that the adjustment to the Arm’s Length Price proposed by the learned TPO is not only disproportionate, but also irrational and illogical. Ground No. 4(ii): The Honourable DRP and the learned AO ought to have appreciated the fact that while the aggregate value of the sale made to the Associated Enterprises in the Infrastructure segment amounted to a mere 4.5% of the total Infrastructure segment revenue, the adjustment proposed by the learned TPO amounted to 128% of the total revenues earned from international transactions with the Associated Enterprises. Ground No. 4(iii): The Honourable DRP and the learned AO ought to have appreciated the fact that the learned TPO erred in considering the whole of the costs incurred by the Infrastructure

5 IT (T.P) A No.1529/Bang/2010 segment for the purpose of computing ALP without ascertaining the possibility of bifurcation of such costs as having been incurred for generating sales to Associated as well as non-associated enterprises, an error which has resulted in a disproportionate adjustment to the ALP as computed by the appellant originally. Use of Contemporaneous Data: Ground No. 5: The Honourable DRP and the learned AO erred in concluding that the appellant ought to have employed contemporaneous data in the preparation of the Transfer Pricing report. This argument of the Honourable DRP is not valid on the principle of fairness and natural justice, as the appellant cannot be expected to use data that is unavailable in the databases at the time of preparing the documentation. The Honourable DRP and the learned AO erred in interpreting the word “Shall” in Rule 10B (4) to mean that data for the same Financial Year in which the international transaction was actually entered into is a mandatory requirement. Also the appellant wishes to submit that the Honourable DRP and the learned AO ought to have appreciated that the transfer pricing regulations provide contemporaneous documentation to be mandatory, and not use of data for the same financial year. The Honourable DRP and the learned AO ought to have appreciated the fact that the objective underlying the use of multiple-year data was to ensure that the outcomes of the international transactions for the year under consideration were based on all the earlier periods which were relevant for determination of transfer price. Moreover the data of the preceding two financial years gives a clear indication of the business and economic conditions prevailing at the beginning of the relevant financial year i.e. the time when the transfer prices are set up, and the purpose of using multiple year data is to minimize and even out the impact of any abnormal factor which might have unduly influenced the outcomes of the data used for the comparability analysis. Escorts Limited should not be rejected: Ground No. 6(i): The Honourable DRP and the learned AO have erroneously rejected Escorts Ltd, which was selected by the Appellant, on the ground that the company had a different accounting year ending. The Learned TPO has erred in not obtaining information from Escorts Ltd regarding the financial results for the 12 month period ending 31st March 2006. Ground No. 6(ii): The Honourable DRP and the learned AO ought to have appreciated the fact that the learned TPO has not disputed the selection of Escorts Limited on the basis of any functional parameter, but solely on the ground that the financial results for the 12th month period ending 31st March 2006 were not available. Ground No. 6(iii): The Honourable DRP and the learned AO ought to have appreciated that the learned TPO could have ascertained the results for the financial year ended 31st March 2006 of Escorts Limited by issuing notices under the provision of Section 133(6) of the Act.

6 IT (T.P) A No.1529/Bang/2010 Error in value of other income: Ground No.7: The Honourable DRP and the learned AO erred in not appreciating the fact that the learned TPO had omitted to consider a portion of service income forming part of other income for the purposes of computing the margins of the Infrastructure segment of the appellant’s business. While the learned TPO has included a sum of Rs.69,500,000 from the other income portion as income relating to services, the actual amount embedded in the other income component but relating to the services amounted to Rs.80,815,726 Adjustments to be done only for International Transactions only: Ground No. 8(i): Without prejudice to the aforementioned grounds, the appellant wishes to emphasise that in the event the learned TPO was of the opinion that an adjustment needed to be performed to the Arm’s Length Price as originally determined by the appellant, for the infrastructure group, the same ought to have been done only for the international transactions entered into with the Associated Enterprises. Ground No. 8(ii): Without prejudice to the grounds as set out from 1 to 8(i) above, the appellant wishes to emphasise that in the event the learned TPO was of the opinion that an adjustment to the Arm’s Length Price as originally computed by the appellant was warranted, the learned TPO ought to have bifurcated the costs on a rational, scientific and systematic basis between the transactions entered into between the Associated and non Associated enterprises. Safe Harbour provisions as postulated under the Proviso to Section 92C(2): Ground No. 9: Without prejudice to any of the appellant’s other grounds of appeal, if at all any adjustment is made, the same should be made only to the lower limit of the 5% range set out u/s 92C (2). Error in computation of imputed cost of interest: Ground No. 10: The Honourable DRP and the learned AO have erred in upholding an adjustment of `56,28,000 made by the learned TPO as interest on outstanding debt and have failed to appreciate the fact that arms length principle is not applicable on notional income. Ground No. 11:The learned TPO has failed in applying the prescribed methods in determining the arms length price for interest on outstanding debt and treating the receivable on par with investment grade bond rated as BBB by credit rating agencies. Ground No. 12:Also the learned AO/DRP/TPO have failed to appreciate the fact that on a consolidated basis, the outstanding payable of the appellant due to the holding company and other fellow subsidiaries is more than the outstanding receivable from the holding company and fellow subsidiaries. Ground No.13: Without prejudice to the above, we respectfully submit that should the learned Transfer Pricing Officer propose to impute interest on such advances, which the assessee has

7 IT (T.P) A No.1529/Bang/2010 never earned, it would result in a hypothetical income and not real income. The supreme court in the case of Commissioner of Income Tax Vs. Bokaro Steel Ltd. 236 ITR 315 1999 SC has held that only real income can be brought to tax and not hypothetical income. Error in levying interest under the provisions of Section 234C: The Honourable DRP and the learned AO have grossly erred in levying a sum of `642,471 as interest under the provisions of Section 234C of the Act. The appellant craves leave to add to, alter, vary, omit or substitute the aforementioned grounds of appeal or add a new ground/(s) of appeal at any time before or at the time of hearing of the appeal.” In the course of appellate proceedings, the assessee had filed various details in paper book, detailed notes on arguments and compilation of case laws which have been taken on record and are duly considered. 4. The Grounds at S.Nos.1 & 2, being general in nature and not urged before us are dismissed as infructuous. Manufacturing Segment (T.P. Adjustment – Rs.11,28,38,758). 5.0 The issues raised by the assessee in respect of the T.P. Adjustment made in the manufacturing segment can be broadly classified as under :- (i) At Ground No.3 of this appeal, the assessee contends that the Assessing Officer / TPO had erroneously considered the international transactions of the Air Solutions Segment consisting of sales amounting to Rs.84,50,33,854 as a part of infrastructure segment while making the adjustment. (ii) In Grounds No. 4 and 8, the assessee's contentions are that adjustments are to be made only in connection with AE transactions of the assessee rather than the entire infrastructure segment.

8 IT (T.P) A No.1529/Bang/2010 (iii) In Grounds at S.No.3, 4 & 7, the assessee contends that there is an error in computing the operating margin of the infrastructure segment since – (a) Other income has been considered incorrectly. (b) Excise duty is to be removed from sales and costs. (iv) Ground No.6 is in respect of rejection of Escorts Ltd., a company with different year ending. (v) Ground No.5, is in respect of the rejection of Multiple year data. 6.1 In the year under consideration, the financial results of the assessee are as under :- Operating Revenue Rs.493,79,26,646 Operating Cost Rs.455,89,35,409 PBIT Rs.373,89,91,237 PBIT as % of Cost 8.31%

6.2 The international transactions reported by the assessee in the year under consideration are as under :- International Transactions (Rs.) 1. Import of components and spares. 51,97,13,905 2. Import of finished goods 13,01,31,245 3. Export of finished goods, components and spares. 86,87,23,023 4. Rendering of CAD/CAM services 6,05,05,588 5. Co-ordinating sales for commission. 39,85,518 6. Recovery of expenses 1,83,55,185 7. Reimbursement of expenses 38,54,136

9 IT (T.P) A No.1529/Bang/2010 Adjustment only on the Infrastructure Segment. 6.3 The assessee had undertaken its T.P. Study with respect to the following two segments separately :- (i) Air Solutions, and (ii) Infrastructure Segments. The TPO, however, rejected the assessee's T. P. Study mainly due to the non-use of current year data, use of earlier year data of the comparable companies and use of comparable companies with different accounting years. After making these observations, the TPO proceeded to examine the comparability of the 5 comparable companies chosen by the assessee. The TPO accepted 4 of the companies chosen by the assessee as comparables, which are as under :- i. Andhra Pradesh Heavy Machinery & Engineering Ltd. ii. Bharat Earth Movers Ltd. iii. Elcon Engineering Co. Ltd. iv. TRF Ltd. The TPO, however, rejected the fifth comparable company, i.e. Escorts Ltd, on the ground that the company has different accounting year i.e. ending in September and therefore it cannot be considered for comparability analysis. 6.4 The TPO worked out the margins of the other four comparables, listed at (i) to (iv) (supra) by considering the current years data and computed the mean margin of the comparable companies at 15.68% as against the assessee's margin of 8.31% and determined the T. P. Adjustment as under :-

10 IT (T.P) A No.1529/Bang/2010 Operating Cost Rs.455,89,35,409 Arms Length Margin 15.68% of the Operating Cost Arms Length Price @ 115.68% of operating cost (a). Rs.527,37,76,481 Operating Revenues (b) Rs.493,79,26,646 Price shown in the international transactions (c) Rs.93,32,14,129 Sales with unrelated parties (d) = (b) – (c) Rs.400,47,12,517 Arm’s Length Price of international transactions Rs.126,90,63,964 (e) = (a) – (d) Shortfall being adjustment u/s.92CA (f) = (e) – (c) Rs.33,58,49,835 The above shortfall of Rs.33,58,49,835 is treated as transfer pricing adjustment u/s.92CA. 6.5.1 The first issue raised by the assessee against the adjustment of Rs.33,58,49,835 was that the Assessing Officer / TPO had erroneously considered the international transactions of Air Solutions Segment consisting of sales of Rs.84,50,33,854 as part of the infrastructure segment while making the adjustment. It was submitted by the learned Authorised Representative that the manufacturing segment of the assessee consisted of two separate segments namely, (i) Air Solutions Segment and (ii) Infrastructure Segment, for which separate bench marking had been carried out for these two segments in the assessee's T. P. Study. To support his contention, the learned Authorised Representative referred to the assessee's T.P. Study which is placed at pages 122 to 258 of the assessee's paper book; and specifically to pages 66 to 74 of the T.P. Study, at pages 185 to 193 of the assessee's paper book to establish that separate bench marking was done for both segments separately; different comparables were chosen for the two segments and ALP was drawn up separately for both the segments. The learned Authorised Representative also drew the attention of the bench to the fact that the comparables adopted by the TPO for making the adjustment were the 4 comparables

11 IT (T.P) A No.1529/Bang/2010 related to the infrastructure group and that the three comparables selected by the assessee for the air solutions group are not considered by the TPO at all. 6.5.2 It was therefore contended by the learned Authorised Representative that while the adjustment made by the TPO pertains to the infrastructure segment only, the TPO has also taken the sales of the air solutions segment while computing the ALP adjustment. The learned Authorised Representative drew our attention to the order dt.29.6.2010 passed by the TPO under Section 92CA rws 154 of the Act wherein the value of the international transactions has been taken at Rs.93,32,14,129. It was contended by the learned Authorised Representative that out of this amount of Rs.93,32,14,129, a sum of Rs.84,50,33,854 pertains to the air solutions segment and only an amount of Rs.8,81,80,275 pertains to the infrastructure group and only this amount of Rs.8,81,80,275 ought to be considered for adjustment as against the amount of Rs.93,32,14,129 adopted by the TPO. 6.5.3 On being specifically asked whether this issue was raised before the TPO, the learned Authorised Representative answered in affirmative and drew the attention of the Bench to the assessee's application under Section 154 of the Act dt.2.2.2010, which is placed at pages 40 to 48 of the assessee's paper book. It is submitted that this issue has been raised before the TPO at para 2.3.1 of the said application under Section 154 of the Act. The learned Authorised Representative also mentioned that the assessee had filed a rectification application dt.6.1.2011 before the DRP on this issue and a further

12 IT (T.P) A No.1529/Bang/2010 rectification application dt.20.6.2011 was filed before the TPO which is not yet disposed off. 6.5.4 The learned Authorised Representative also submitted a chart giving the details of the international transactions relating to the infrastructure and Air Solution Segments and also the transactions between Associated Enterprises (AEs) and non-AEs to support his contention. 6.6 Per contra, the learned Departmental Representative supported the orders of the TPO and defended the action of the TPO. On being specifically asked, the learned Departmental Representative submitted that apparently there are two segments involved, but pointed out that the figures given in the chart filed by the learned Authorised Representative, shown in the T.P. Study, are different from the figures adopted by the TPO. 6.7.1 We have heard the rival contentions and perused and carefully considered the material on record. The assessee had adopted TNMM as the Most Appropriate Method (MAM) and the Op Revenue / Op Cost as the Profit Level Indicator (PLI), which has been accepted by the TPO. From the T.P. Study, it is seen that the assessee has reported two segments merely, Infrastructure Group and Air Solutions Group and has bench marked the two segments separately. As regards the international transactions related to the Infrastructure Group, the assessee has selected the following five companies as comparables :-

13 IT (T.P) A No.1529/Bang/2010 1) Bharat Earth Movers Ltd. 2) Elcon Engineering Ltd. 3) TRF Ltd. 4) Andhra Pradesh Heavy Machinery & Engineering Ltd. 5) Escorts Ltd. As regards the international transactions related to the Air Solutions Group, the assessee had selected the following three companies as comparables :- 1) Elgi Equipments Ltd. 2) Kirloskar Copeland Ltd. 3) Kirloskar Pneumatic Co. Ltd. 6.7.2 In the T.P. order passed by the TPO under Section 92CA of the Act dt.28.10.2009, it is seen that there is neither any mention whatsoever about the two segments nor is there any finding whether the TPO accepts or rejects the segmental details furnished by the assessee. However, for the computation of the ALP of international transactions, the TPO has adopted four out of five of the comparables chosen by the assessee in its T.P. Study for its infrastructure group and also adopted the current year margins of these comparables for determining the mean margin of the comparables. From these details as emanate from the record, it is clear that the TPO has made an adjustment only to the Infrastructure Group Segment and has not proposed any T.P. Adjustment for the Air Solutions Segment. That being the case, it is but appropriate that only those transactions pertaining to the infrastructure group segment are

14 IT (T.P) A No.1529/Bang/2010 considered for making the T.P. Adjustment. In this factual matrix, we hold and direct that the adjustments are to be made only on those transactions pertaining to the Infrastructure Group Segment, as decided by the TPO in his order under Section 92CA of the Act, and that the computation is to be decided accordingly. 6.7.3 In respect of the contention about the quantum of international transactions to be considered for determination of ALP, it is seen that the assessee had raised the issue before the TPO in the rectification application dt.2.2.2010 but the TPO has not rendered any finding on the same in the order passed thereon under Section 92CA rws 154 of the Act dt.29.6.2010. In the said rectification application, the segmental break up of the transactions is enclosed as per Annexure 2 thereof. However, while the copy of the rectification application dt.2.2.2010 has been submitted in the paper book filed at pages 40 to 48 thereof, we find that the Annexure 2 giving the segmental break-up submitted to the TPO has not been placed / filed in the said paper book. We are, therefore, unable to relate the segmental details submitted to the TPO with the details placed before us in the chart submitted by the learned Authorised Representative. 6.7.4 Even otherwise, the segmental details made to be examined in detail to decide how much of it relates to the Infrastructure Group Segment and how much to the Air Solutions Segment. As the TPO has not examined the same and rendered any finding in this regard, we deem it appropriate to remand this issue back to the file of the TPO to examine the matter and determine the quantum of international transactions on which the transfer pricing adjustment has to be made. We, therefore, set aside the matter to the

15 IT (T.P) A No.1529/Bang/2010 file of the TPO with directions that the adjustment may be made only on international transactions relatable to the Infrastructure Group Segment and the quantum of international transactions relatable to the Infrastructure Group may be decided afresh after considering the evidence furnished by the assessee and affording adequate opportunity to the assessee of being heard and to file details and submissions in this regard. It is ordered accordingly. Consequently, Ground No.3 of the assessee's appeal is treated as allowed for statistical purposes. 7. Ground Nos.4 & 8 – Adjustment only on AE transactions. 7.1.1 In the Grounds at S.Nos.4 & 8, the assessee contends that the adjustments are to be made only on AE transactions related to the Infrastructure Segment and not only the entire transactions of the segment. It was submitted by the learned Authorised Representative that the infrastructure segment which has been subjected to T.P. Adjustment consisted of both the sales made not only to AEs and but also to non-AEs. The learned Authorised Representative submitted the sales revenues from the AEs only Rs.8,81,80,275 out of the Revenues of Rs.1,76,49,86,478 of the total infrastructure segment, as can be seen from the details extracted in the Table below :- Particulars Revenue from Revenue from Total (Rs.) AEs (Rs.) Non-AEs (Rs.) Sales of finished 2,36,89,169 1,67,68,06,203 1,70,04,95,372 goods Rendering of 6,05,05,588 6,05,05,588 services Sales Commission 39,85,518 39,85,518 8,81,80,275 1,67,68,06,203 1,76,49,86,478

16 IT (T.P) A No.1529/Bang/2010 7.1.2 It was therefore submitted by the learned Authorised Representative that the transactions with AEs works out to only about 5% of the total revenue from infrastructure segment and that if at all any adjustment is warranted to the ALP, the same ought to be restricted only to the AE transactions amounting to Rs.8,81,80,275. In support of this contention, the assessee's counsel placed reliance on the following judicial pronouncements :- i) IL Jin Electronics (India) Pvt. Ltd. V ACIT 36 SOT 227 (Del) ii) Emersons Process Management India Pvt. Ltd. (ITA No.7878/Mum/2011). iii) Demag Cranes & Components (India) Pvt. Ltd. (ITA No.170/PN/2011) In the course of proceedings before us, the learned Authorised Representative submitted the details of AE and Non-AE transactions in a chart and contended that the details of AE transactions have been reported in the Form 3CEB which was before the TPO in TP proceedings. 7.2.1 We have heard both the learned Authorised Representative of the assessee and the learned Departmental Representative in the matter and perused and carefully considered the material on record; including the judicial pronouncements cited by the assessee in support of the proposition that the T.P. Adjustments have to be carried out only on the international transactions of the infrastructure group segment of the assessee. 7.2.2 As regards the quantum of AE transactions that are required to be considered for determination of ALP, it is seen that the assessee had raised the issue before the TPO in

17 IT (T.P) A No.1529/Bang/2010 the rectification application dt.2.2.2010, but we find that the TPO has not rendered any specific finding on the same in the order under Section 154 of the Act passed by him on 29.6.2010. Detailed examination is required to ascertain the extent of the transactions that pertain to the AEs on which adjustments have to be made. As the TPO has not examined the same or rendered any finding thereon, we are of the opinion that it would be appropriate to remand the issue back to the file of the TPO to examine and determine the quantum of AE transactions on which the T.P. Adjustment has to be made. We, therefore, restore this matter to the file of the TPO with the direction that the adjustment may be made only on the AE transactions related to the Infrastructure Group Segment after affording the assessee adequate opportunity of being heard and considering the submissions / details / evidence furnished by the assessee in this regard. 8. Grounds No.3, 4 & 7 : Error in computation of operating margin in Infrastructure Segment. 8.1 The assessee has contended that notwithstanding the submissions on the T.P. Adjustment, the following errors have crept into the computation of the operating margin :- (i) that the TPO has erroneously considered the other operating income of the infrastructure segment to be Rs.6,95,00,000 instead of the correct figure of Rs.7,89,27,267 for computing the operating profitability of the Infrastructure Segment while computing the T.P. Adjustment.

18 IT (T.P) A No.1529/Bang/2010 (ii) that the excise duty being pass through costs, the same should be excluded from the sales as well as from the operating expenses while computing the operating profitability of both the assessee as well as comparable companies. 8.2 Before us, the learned Authorised Representative submitted that the TPO has adopted the figure of other operating income of the infrastructure segment wrongly in the computation of the T.P. Adjustment. In this regard, we direct the TPO to examine this contention of the assessee and adopt the correct figure i.e. Rs.6,95,00,000 or Rs.7,89,27,267 after due verification. 8.3.1 As regards the treatment of excise duty while computing the margins, the learned Authorised Representative submitted that the excise duty being pas through costs, it should be excluded from the sales as well as from the operating expenses while computing the margin. In support of this proposition, the learned Authorised Representative cited and placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Toyota Kirloskar Motors Ltd. V ACIT in ITA No.828/Bang/2010 dt.22.11.2012. 8.3.2 We have perused and carefully considered the material on record in regard to this issue. We find that the decision of the co-ordinate bench of this Tribunal in the case of Toyota Kirloskar Motors Ltd. (supra) is applicable to the facts of the case on hand. The co-ordinate bench at para17.5 of its order held as under :- “ 17.5 We have heard both parties on the issue of excise duty adjustment and perused the material on record. On careful consideration of the same, we are of the view that the assessee's ground on excise duty adjustment needs to be allowed. The assessee collects excise duty as levied by the Central Government and there is no profit element involved in collecting the same and remitting it to the Government. Excise duty is a ‘pass through cost’ and financial statements are

19 IT (T.P) A No.1529/Bang/2010 prepared net of excise duty and based on this the profitability is worked out. TP regulations are based on the actual margins and ‘pass through’ items like excise duty are not to be considered while computing margins as is also the case with the comparable companies. The learned Departmental Representative too did not appear to have serious objections to the exclusion of excise duty in arriving at the margins. In view of this, we direct the Assessing Officer / TPO to perform the TP comparability analysis excluding excise duty from sales as well as costs for both the assessee and the comparable companies so as to maintain consistency / parity and to compute the margins accordingly.” Following the afore cited decision of the co-ordinate bench of ITAT, Bangalore in the case of Toyota Kirloskar Motors Ltd. (supra), we hold and direct that excise duty shall be excluded from sales as well as costs for both the assessee and the comparable companies while computing the margins. 9. Ground No.6 : Escorts Ltd. should not be excluded as a comparable. 9.1 In the TPO’s order under Section 92CA of the Act, while the TPO accepted four out of the five comparables selected by the assessee for the infrastructure segment, he rejected one of the comparables, namely Escorts Ltd., on the ground that it had a different year ending. In this regard, as per the assessee's admission, this company had a different year ending and the figures related to the year ending 31st March were not available. We are of the view that in the above factual matrix, since the financial figures adopted for this company were for a different period, the TPO was right in holding that it is not comparable. We, therefore, find no infirmity in the decision of the TPO in rejecting this company as a comparable company. Consequently, Ground No.6 raised by the assessee is dismissed.

20 IT (T.P) A No.1529/Bang/2010 10. Ground No.5 - Multiple year data should be accepted. 10.1 The assessee has used Multiple Year Data while computing the margins of comparable companies. The TPO, however, while accepting four of the five comparables chosen by the assessee, has considered the current year’s data for these comparable companies while computing the margins thereof. The only contention put forth by the assessee against this decision of the TPO is that the assessee cannot be expected to use data that is unavailable in the data bases at the time of preparing the documentation. Before us, the learned Authorised Representative submitted that this ground at S.No.5 is not being pressed in this appeal. We, consequently, dismiss Ground No.5 raised by the assessee. 10.2 Even otherwise, this ground No.5 raised by the assessee is liable to be dismissed. Rule 10B(4) of the IT Rules, 1962 specifies the requirement regarding data to be used for adopting the comparability of an uncontrolled transaction with an international transaction, which reads as under :- “ Rule 10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction 56a[or a specified domestic transaction] shall be the data relating to the financial year in which the international transaction 56a[or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.” 10.2.2 The use of the word “shall” in the main provision of the Rule makes it abundantly clear that the use of data of the current financial year (i.e. of the financial year in which the international transaction was actually entered into) is a mandatory requirement of law

21 IT (T.P) A No.1529/Bang/2010 in the comparability analysis to be undertaken as per Indian T.P. Regulations. It is only the proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only, if it is established that the data reveals facts which could have an influence on the determination of the transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be disposed with even if the relevant data was not available to the assessee in the public data base at the time of preparation of its T.P. Study. Non-availability of information in the public data base can at best be relevant to explain the discharge of the assessee's obligation of maintaining the prescribed documentation under Section 92D(i) of the Act r.w. Rule 10B of the I.T. Rules, 1962. However, such non-availability will not dispense with the mandatory requirement of Rule 10B(4) for using current financial year data in conducting comparability analysis and in determining the ALP in accordance with section 92C(1) and 92C(2) of the Act. As it is mandatory requirement of law to utilise data of the current financial year to conduct the comparability analysis at the time of transfer pricing proceedings, the TPO is not only empowered but is also duty bound to determine the ALP using such contemporaneous data for this purpose even if such data was not available to the assessee in the public data bases at the time of preparation of its T.P. Study report. Further, we are also of the view that the TPO has rightly rejected the use of earlier year’s data by the assessee, as the assessee failed to establish how such earlier year’s data had an influence on the prices of the current financial year. Consequently, Ground No.5 raised by the assessee is dismissed.

22 IT (T.P) A No.1529/Bang/2010 11. Ground Nos.10 to 13 – Interest on Receivable - Rs.56,28,000. 11.1 In the course of T.P. proceedings, the TPO observed that there are certain receivables from the AEs which were due for a period in excess of six months at the end of the financial year. The TPO, therefore, held that the delay in collection had impacted the profits of the assessee and therefore an adjustment towards notional interest on net receivables (deducting payables from the receivables) outstanding from its AEs was necessary. Accordingly, the TPO made the adjustment as under :- Particulars Amount (Rs.) Receivables from AEs 32.50 Crores Payable to AEs 28.48 Crores Net outstanding 4.02 Crores Arm’s Length Price of interest @ 14% 56,28,000 Interest charged NIL T.P. Adjustment 56,28,000

11.2.1 In the appellate proceedings before us, the learned Authorised Representative assailed the adjustment of Rs.56,28,000 on several grounds which are summarised as under :- 1) Notional income cannot be subjected to tax (Ground Nos. 10 & 13). 2) No interest has been charged on delayed realisations in case of Non-AE transactions and therefore such an adjustment on AE transactions is not tenable (Ground No.12). 3) No trade receivables are outstanding from AEs for more than 6 months (Ground No.12). 4) Without prejudice, notional interest is to be computed on the net receivables after netting off payables to all the AEs considered in the aggregate (Ground No.12). 5) The interest rate adopted at 14% is wrong. 11.2.2 On the first issue of taxability of notional income, the assessee submitted that the TPO has tried to bring within the ambit of Section 92, a transaction that is non-

23 IT (T.P) A No.1529/Bang/2010 existent and in the absence of any provision in the Act, the tax-payer cannot be subjected to tax in respect of ‘hypothetical income.’ In the case on hand, since no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AEs, the question of applying the provisions of Section 92 of the Act does not arise. In support of this proposition, the assessee placed reliance on the following judicial pronouncements :- 1) Vodafone India Services Pvt. Ltd. V UOI (W.P. No.871 of 2014) 2) Evonik Degussa P. Ltd. V ACIT – OSD, Circle 3(1) (ITA No.7653/Mum/2011) of ITAT, Mumbai Bench. 11.2.3 It was also submitted by the assessee that it had not charged any interest for delayed realisations even in the case of Non-AE transactions. It was submitted that the debts were outstanding with both the AEs and Non-AEs for a period exceeding the credit period purely because of business reasons and that this is a common business practice prevailing in the industry and the delay if any in the payment is not due to extension of credit period by the assessee to its AEs. In this regard, the assessee placed reliance on the decision of the Hon'ble High Court of Bombay in the case of CIT V Indo American Jewellery Ltd., in ITA No.1053 of 2012. 11.2.4 The assessee further made the following submissions :- (i) The TPO had mentioned, in his order under Section 92CA of the Act, that debts outstanding for more than 6 months is considered for making the T.P. Adjustment towards notional interest. However, the actual adjustment has been made on the total amount of

24 IT (T.P) A No.1529/Bang/2010 receivables. In this regard, it was submitted by the learned Authorised Representative that there were no receivables from AEs outstanding for more than 6 months. (ii) It was submitted that if at all any adjustment had to be made, the notional interest is to be computed on the net receivables after netting off payables to all the AEs and not only to the holding company, as taken by the TPO. (iii) It was submitted that the TPO has erred in adopting an interest rate of 14% by stating that in terms of the financial health, the AEs of the assessee are not considered fit to be returned even as BBB (Moderate Safety) as per CRISIL rating. Having so stated, the TPO orbitrarily concluded that the interest rate for BBB rated corporate Bond rates at 11.45% and with an upward adjustment of 20% to arrive at the conclusion that the rate of interest of 14% is reasonable. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below. 11.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited and placed reliance upon. We find that the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa P. Ltd. V ACIT – OSD, Circle 3(1), Mumbai (ITA No.7653/Mum/2011, dt.21.11.2012) of ITAT, Mumbai Bench is squarely applicable to the facts of the case in the case on hand. In this decision the ITAT, Mumbai Bench at para 28 thereof has held as under :- “ 28. After carefully considering the rival submissions and the orders of the TPO as well as the direction of the DRP, we find that the assessee has no interest liability and it does not have any external borrowings. Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to

25 IT (T.P) A No.1529/Bang/2010 the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. From the summary of payment submitted by the learned Counsel, it is seen that the billing is done on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the AEs only. Moreover, the T.P. Adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case and is, accordingly, deleted.”

11.4.2 Following the above decision of the ITAT, Mumbai Bench in the case of Evonik Degussa India P. Ltd. (supra), we also hold that the addition on account of notional interest relating to alleged delayed payment in collection of receivables from AEs is not called for. However, as can be seen from the extract of the decision reproduced above, the above decision has been rendered in the factual context that there has been no agreement for charging interest on delayed payment. We, therefore, deem it appropriate to remand this issue back o the file of the Assessing Officer / TPO for examination as to whether there was any agreement for charging interest on late payments or not and if it is found that there was no such agreement, then the T.P. Adjustment made in this regard requires to be deleted. As this issue has been decided, in principle, in favour of the assessee by placing reliance on the aforesaid decision of the ITAT, Mumbai Bench (supra), it is not necessary for us to adjudicate on the other grounds of appeal raised on this issue. Consequently, the grounds raised at S.Nos.10 to 13 relating to the issue of interest on receivables are disposed off accordingly.

26 IT (T.P) A No.1529/Bang/2010 12. Ground No.14 – Charge of interest u/s.234C of the Act. 12.1 in Ground No.14, the assessee denies itself liable to be charged interest under Section 234C of the Act. The charging of interest is consequential, mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234C of the Act, if any, while giving effect to this order. 13. In the result, the assessee's appeal is partly allowed for statistical purposes. Order pronounced in the open court on 24th April, 2015.

Sd/- Sd/- (N.V.VASUDEVAN) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, - ‘A’ Bench. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore