Demag Cranes & Components (India) Private Limited v. Deputy Commissioner of Income-tax, Circle – 1(2), Pune
[Citation -2016-LL-1019-207]

Citation 2016-LL-1019-207
Appellant Name Demag Cranes & Components (India) Private Limited
Respondent Name Deputy Commissioner of Income-tax, Circle – 1(2), Pune
Court ITAT-Pune
Relevant Act Income-tax
Date of Order 19/10/2016
Assessment Year 2009-10
Judgment View Judgment
Keyword Tags initiation of penalty proceedings • installation and commissioning • interest under section 234a • international transaction • transfer pricing officer • collaboration agreement • directions of tribunal • appropriate adjustment • reasonable opportunity • information technology • associated enterprise • foreign exchange loss • incorrect computation • determination of alp • revenue expenditure • capital expenditure • warranty provision • single transaction • technical know-how
Bot Summary: The TPO rejected the method adopted by the assessee and directed the assessee to segregate the activities into three distinct business segments viz. The raw materials, components and spares were imported by the assessee as the assessee had not established full-fledged manufacturing activity of inputs in India during the impugned assessment year. The Tribunal in assessee s own case in ITA No. 120/PN/2011 for assessment year 2006-07 decided on 04-01-2012 remitted the issue back to the TPO with direction to examine the claim of assessee relating to the import cost factor and eliminate the difference, if any. According to the assessee, in the financial statements affirmed by the Auditors, the activities have been clubbed together in accordance with the Accounting Standards prescribed by the ICAI. It was clarified that the segmental profits were worked out by the assessee only at the asking of the TPO during the proceedings before him. The assessee s claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. AR of the assessee has contended that there has been substantial fall in the value of INR vis- -vis EURO. Since, the assessee is using significant volume of imported inputs viz. In ground No. 9 the assessee has assailed the action of TPO and DRP in re-characterization of expenditure incurred on purchase of software and information technology including payment of license fees as revenue expenditure, whereas the assessee has claimed the same as capital in nature.


IN INCOME TAX APPELLATE TRIBUNAL B BENCH, PUNE BEFORE SHRI VIKAS AWASTHY, JM AND SHRI PRADIP KUMAR KEDIA, AM ITA No. 328/PN/2014 Assessment Year : 2009-10 Demag Cranes & Components (India) Private Limited, Gat No. : 330, 332, 333, 334, Nanekarwadi, Chakan, Taluka Khed, Pune-410501 PAN : AABCM9351Q Appellant V/s. Deputy Commissioner of Income Tax, Circle 1(2), Pune Respondent Assessee by : Shri Ajit Tolani Shri Darpan Kirpalani Shri Anshada Rawat Revenue by : Shri Dilip Sharma Date of Hearing : 01-08-2016 Date of Pronouncement : 19-10-2016 ORDER PER VIKAS AWASTHY, JM : This appeal by assessee is directed against assessment order dated 01-01-2014 for assessment year 2009-10 passed u/s. 143(3) r.w.s. 144C(1) of Income Tax Act, 1961 (hereinafter referred to as Act ). 2 ITA No. 328/PN/2014, A.Y. 2009-10 2. brief facts of case as emanating from records are: assessee company is fully owned subsidiary of Demag Cranes and Components, Gmbh, Germany. assessee company is engaged in manufacture and installation of material handling equipments, such as cranes. assessee company also undertakes sales/distribution of imported material handling equipments. assessee filed its return of income for impugned assessment year on 30-10-2009 declaring loss of `3,26,55,765/- and book profit u/s. 115JB of Act, as `5,16,47,303/-. During period relevant to assessment year under appeal assessee had entered into various international transactions with its Associated Enterprises (AEs). aggregate of international transactions entered into by assessee was to tune of `91,46,06,891/-. Assessing Officer made reference to Transfer Pricing Officer (TPO) u/s. 92CA(3) of Act for verification of correctness or otherwise of Arm s Length Price (ALP) of international transactions. TPO vide order dated 03-10-2012 made certain adjustments in international transactions carried out by assessee, which inter alia include segregation of manufacturing-service- trading activities carried out by assessee in respect of cranes and material handling equipments, rejection of adjustment on account of exchange rate appreciation and payment of import duty on import of raw materials, components and spares, refusal to grant working capital adjustment, etc. Aggrieved by order passed by TPO, assessee filed objections before Dispute Resolution Panel (DRP). DRP vide directions dated 30-12-2013 rejected objections filed by assessee. Assessing Officer on basis of directions of DRP 3 ITA No. 328/PN/2014, A.Y. 2009-10 passed impugned assessment order dated 01-01-2014. Now, assessee is in appeal against assessment order before Tribunal. 3. assessee has raised following grounds of appeal : Based on facts and circumstances of case, Demag Cranes & Components (India) Private Limited (hereinafter referred to as 'Appellant') respectfully craves leave to prefer appeal against order under section 143(3) read with section 144C( 13) of Income-tax Act, 1961 ('Act') (dated 01 January 2014), received by Demag India on 07 January 2014 passed by Deputy Commissioner of Income Tax- Circle 1(2) ('AO') in pursuance of directions issued by Dispute Resolution Panel ('DRP'), Pune, under section 253 of Act on following grounds: On facts and in circumstances of case and in law, learned AO based on directions of Honourable DRP has: General ground challenging transfer pricing adjustment 1. erred in making transfer pricing adjustment Rs.19,40,52,900 to total income of Appellant; Non consideration of comparability analysis as documented in transfer pricing study report 2. erred in not considering/accepting comparability analysis undertaken in Transfer Pricing study report for benchmarking international transactions; Rejecting aggregation of international transactions entered into by Appellant 3. erred in rejecting aggregation approach adopted by Appellant in its Transfer pricing study for benchmarking various international transactions pertaining to provision of material handling solutions; Non-inclusion of services income for purpose of computing Appellant's margin from manufacturing activity 4. erred in not including services income for purpose of computing Appellant's margin from manufacturing activity 4 ITA No. 328/PN/2014, A.Y. 2009-10 while computing arm's length price; Selection of inappropriate comparable companies without conducting structured search 5. erred in rejecting certain comparable companies selected by Appellant in its TP report and accepting additional comparable companies selectively, without conducting structured search and thereby considering inappropriate set of companies as comparable. Non grant of adjustment 6. erred in not providing adjustment on account of high import duty incurred for import of raw materials, components and spares for computing arm s length price; 7. erred in not granting working capital adjustment to margins of comparable companies for financial year 2008-09; 8. erred in not granting adjustment on excess costs incurred due to abnormal exchange rate appreciation; Considering capital expenditure as operating expenditure for purpose of computing operating margin 9. erred in considering capital expenditure on information technology services including license fees as operating expenditure for purpose of computing operating margins of Appellant from manufacturing activity; Incorrect computation of transfer pricing adjustment to manufacturing activity 10. erred in computing transfer pricing adjustment on entire manufacturing segment sales instead of computing transfer pricing adjustment on manufacturing segment sales pertaining to import of components and spares from Associated Enterprises only; Use of multiple year data 11. erred in considering operating margins earned by comparable companies based on financial data pertaining to year ended 31 March 2009 only and rejecting financial 5 ITA No. 328/PN/2014, A.Y. 2009-10 data of comparables for FY 2006-07 and FY 2007-08 considered by Appellant Use of contemporaneous data 12. erred in computing arm's length price using financial information of comparable companies available at time of assessment, although such information was not available at time when Appellant complied with these regulations Benefit of +/-5% range 13. erred in computing arm's length price of international transactions pertaining to manufacturing activity without taking into account benefit of +/- 5 per cent variation from mean, which is permitted and opted for by Appellant under provisions of section 92C(2) of Act; Short grant of credit for taxes deducted at source 14. erred in granting short credit for taxes deducted at source of Rs.95,485. Erroneous levy of interest under section 234A of Act 15. erred in levying interest under section 234A of Act on account of late filing of return of income; Erroneous levy of interest under section 234B of Act 16. erred in levying interest under section 2348 of Act Erroneous levy of interest under section 234C of Act 17. erred in levying interest under section 234C of Act; Initiation of penalty proceedings under section 271(1)(c) of Act 18. erred in initiating penalty proceedings under section 271(1)(c) of Act. above grounds of appeal are mutually exclusive and without prejudice to one another. Appellant craves leave to add, alter, vary, omit, substitute or amend 6 ITA No. 328/PN/2014, A.Y. 2009-10 above grounds of appeal, at any time before or at, time of hearing of appeal, so as to enable learned AO to decide this appeal according to law. Appellant prays that appropriate relief be granted based on grounds of appeal and facts and circumstances of case. 4. Shri Ajit Tolani appearing on behalf of assessee submitted at outset that he would not be pressing ground Nos. 2, 10, 11, 12, 13 and 14 raised in grounds of appeal. In respect of ground Nos. 3 and 4 ld. AR contended that activities of assessee includes : (i) manufacturing of cranes, (ii) installation of cranes (i.e. erection and commissioning of cranes), import and sale of cranes, components and spares and (iv) services to equipments. Thus, above activities include manufacturing, trading and assembly services. assessee enters into single contract with its customers for installation, commissioning and services of cranes. sale and installation is followed by repair, maintenance and supply of spares. These contracts are executed over period of time. While calculating cost relating to project, assessee considers project as whole instead of calculating individual profitability from different activities viz. manufacturing, trading and service. TPO rejected method adopted by assessee and directed assessee to segregate activities into three distinct business segments viz. manufacturing, trading and service. assessee objected to same. It was contended that even in case of comparable companies, three activities are not segregated. On specific directions of TPO, assessee segregated three activities and furnished data. However, at time of benchmarking, TPO selected comparables having reported financial results from integrated activities of manufacturing, trading and service. Against order of TPO 7 ITA No. 328/PN/2014, A.Y. 2009-10 assessee filed objections before DRP. DRP upheld findings of TPO on this issue. ld. AR contended that assessee had furnished comparative data of comparables engaged in manufacturing, trading and service of cranes. ld. AR draws our attention to page 886 of paper book wherein details of company i.e. Brady & Morris Engg. Co. Ltd. engaged in same line of business are given. ld. AR further submitted that in assessment years 2007-08 and 2008-09 Tribunal in assessee s own case has remitted issue back to file of Assessing Officer with direction to club activities of manufacturing and service and segregate results of trading activities. ld. AR referred to order of Tribunal in ITA No. 1683/PN/2011 for assessment year 2007-08 decided on 31-12-2012 and ITA No. 263/PN/2013 for assessment year 2008-09 decided on 24-12-2013. ld. AR further submitted that TPO and Assessing Officer while given effect to order of Tribunal for assessment year 2007-08 has clubbed manufacturing and service activities and has separated trading activities for arriving at PLI of assessee company. ld. AR referred to TPO order dated 29-01-2014 at pages 474 to 495 of Paper Book-I. 4.1 In respect of ground No. 5 ld. AR contended that TPO has erred in selecting Elecon Engineering Co. Ltd. as one of comparables. said company was initially selected by assessee in its TP report. However, TPO without conducting structured search and without considering appropriate set of companies as comparable proceeded with determining ALP. Elecon Engineering Co. Ltd. was rejected by Tribunal in assessee s own case in immediately preceding assessment year i.e. assessment year 2008-09. Tribunal excluded said company from list of comparables, 8 ITA No. 328/PN/2014, A.Y. 2009-10 as segmental working capital details were not available. Even in assessment year under appeal position is same. ld. AR thus, prayed for excluding Elecon Engineering Co. Ltd. from list of comparables. 4.2 In respect of ground No. 6 ld. AR contended that TPO and DRP has erred in not granting adjustment with respect to high import duty paid on import of raw materials, components and spares for computing arm s length price. raw material and components imported form integral part of manufacturing process carried out by assessee. quality of raw materials, spares and components imported from AEs are not available in market locally. raw materials, components and spares were imported by assessee as assessee had not established full-fledged manufacturing activity of inputs in India during impugned assessment year. Although, assessee is in existence for last 12 years in India, comparable companies are in existence for significantly far more number of years. Therefore, comparable companies have advantage of localized inputs. high import of raw materials and components has cascading effect on customs duty as compared to comparables. ld. AR contended that similar issue had come up before Tribunal in assessee s own case in assessment year 2006-07. Tribunal in assessee s own case in ITA No. 120/PN/2011 for assessment year 2006-07 decided on 04-01-2012 remitted issue back to TPO with direction to examine claim of assessee relating to import cost factor and eliminate difference, if any. TPO in assessment year 2010-11 has allowed adjustment with respect to import duty on raw materials, components and spares for determining ALP. ld. AR referred to 9 ITA No. 328/PN/2014, A.Y. 2009-10 order of TPO dated 28-01-2014 for assessment year 2010-11 at pages 701 to 721 of Paper Book-II. 4.3 In respect of ground No. 7 relating to grant of working capital adjustment ld. AR submitted that this issue is squarely covered by decision of Tribunal in assessee s own case in ITA No. 120/PN/2011 for assessment year 2006-07 decided on 04-01-2012 and ITA No. 1683/PN/2011 for assessment year 2007-08 decided on 31-12-2012. TPO allowed working capital adjustment to assessee in assessment year 2008-09 and assessment years subsequent to assessment year under appeal. 4.4 In ground No. 8 assessee has assailed action of TPO and DRP in not granting adjustment with respect to abnormal exchange rate appreciation. ld. AR submitted that TPO has ignored basic accounting principle of reporting foreign exchange loss while rejecting foreign exchange adjustment. During financial year 2008-09 value of INR depreciated rapidly vis- -vis major currencies of world, such as EURO. Since, assessee was dependent on import for its production requirements, assessee was adversely affected by this extraordinary movement in foreign currency rates. ld. AR pointed that in financial year 2008-09 there was increase of about 15.15% in average rate of EURO. Since, assessee has very high percentage of imports from its AEs and all invoices being denominated in EURO, cost of raw material/inputs increased significantly. On other hand comparables dependence on import of raw materials/inputs is comparatively much less as compared to assessee. ld. AR in support of his contentions placed reliance on decision of Delhi Bench of Tribunal in 10 ITA No. 328/PN/2014, A.Y. 2009-10 case of Honda Trading Corporation India Private Limited Vs. ACIT in ITA No. 5297/Del/2011 for assessment year 2007-08 decided on 08-03-2013 and order of Pune Bench of Tribunal in case of Amdocs Business Services Private Limited Vs. DCIT in ITA No. 1412/PN/2011 for assessment year 2007-08 decided on 23-07-2012. 4.5 In respect of ground No. 9 relating to expenditure incurred on information technology services including license fees ld. AR submitted that assessee had capitalized software and related expenses worth `4.63 crores in books of account and claimed depreciation on same. Assessing Officer accepted claim of assessee in capitalizing expenditure on software. However, TPO treated same as operating expenditure for purpose of computing operating margin on manufacturing activities. ld. AR submitted that this re-characterization of expenditure from capital to revenue by TPO has resulted in double addition. Either expenditure incurred on acquiring software etc. should be treated as capital expenditure or revenue expenditure. action of TPO which has been upheld by DRP has resulted in double adjustment. 5. Shri Dilip Sharma representing Department vehemently defended order of authorities below. However, in respect of ground Nos. 3 and 4 ld. DR contended that activities of manufacturing and service can be clubbed in line with directions of Tribunal in assessment years 2007-08 and 2008-09. trading activity should be kept separate for determining ALP. In respect of non-grant of adjustment on account of high import duty, working capital adjustment, abnormal exchange rate appreciation, ld. DR submitted that all adjustments are theoretical and no adjustment 11 ITA No. 328/PN/2014, A.Y. 2009-10 per se is required on aforesaid grounds. With respect to treatment of expenditure on software ld. DR contended that issue can be remitted back to Assessing Officer for re-examination and thereafter expenditure can be classified as revenue or capital in nature. On other issues raised in appeal, ld. DR defended findings given in assessment order and directions of DRP. 6. We have heard submissions made by representatives of rival sides and have perused orders of authorities below. assessee has raised as many as 18 grounds in appeal. ld. AR of assessee has stated at Bar that he is not pressing ground Nos. 2, 10, 11, 12, 13 and 14. Accordingly, aforesaid grounds are dismissed as not pressed. 7. ground No. 1 is general and hence, requires no adjudication. 8. ground Nos. 3 and 4 relates to segregation of manufacturing, trading and service activities carried by assessee. It has been contended that assessee enters into comprehensive agreement with its customers with respect to installation, commissioning and erection of cranes along with maintenance and services. Maintenance and service sometimes require spares and components which have to be imported. assessee also imports cranes and material handling equipments which are directly sold to customers. We observe that issue relating to segregation of activities was raised in assessment years 2007-08 and 2008-09, as well. matter travelled up to Tribunal. In assessment year 2007-08 in ITA No. 1683/PN/2011 (supra), Co-ordinate Bench of Tribunal decided issue as under : 12 ITA No. 328/PN/2014, A.Y. 2009-10 30. We have carefully considered rival submissions. Section 92B of Act provides meaning of expression international transaction as transaction between two or more associated enterprises. Rule 10A(d) of Rules explains meaning of expression transaction for purposes of computation of ALP as to include number of closely linked transactions. Rule 10B of Rules prescribes manner in which ALP in relation to international transaction is to be determined by following any of methods prescribed. Shorn of other details, it would suffice to observe that on combined reading of Rule 10A(d) and 10B of Rules, number of transactions can be aggregated and construed as single transaction for purposes of determining ALP, provided of course that such transactions are closely linked . Ostensibly rationale of aggregating closely linked transactions to facilitate determination of ALP envisaged situation where it would be inappropriate to analyse transactions individually. proposition that number of individual transactions can be aggregated and construed as composite transaction in order to compute ALP also finds echo in OECD guidelines under Chapter III wherein following extract is relevant:- Ideally, in order to arrive at most precise approximation of arm s length conditions, arm s length principle should be applied on transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on separate basis. Examples may include 1. Some long term contracts for supply of commodities or services; 2. Rights to use intangible property; and 3. Pricing range of closely linked products (e.g. in product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be licensing of manufacturing know-how and supply of vital components to associated manufacturer; it may be more reasonable to access arm s length terms for two items together rather than individually. Such transactions should be evaluated together using most appropriate arm s length method. further example would be routing of transaction through another associated enterprise; it may be more appropriate to consider transaction of which routing is part in its entirety, rather than consider individual transactions on separate basis. 31. In this background, considering legislative intent manifested by way of Rule 10A(d) read with Rule 10B of Rules, it clearly emerges that in appropriate circumstances where closely linked transactions exist, same should be treated as one composite transaction and common transfer pricing analysis be performed for 13 ITA No. 328/PN/2014, A.Y. 2009-10 such transactions by adopting most appropriate method. In other words, in given case where number of closely linked transactions are sought to be aggregated for purposes of bench marking with comparable uncontrolled transactions, such approach can be said to be well established in transfer pricing regulation having regard to Rule 10A(d) of Rules. Though it is not feasible to define parameters in water tight compartment as to what transactions can be considered as closely linked , since same would depend on facts and circumstances of each case. So however, as per example noted by Institute of Chartered Accountants of India (in short ICAI ) in its Guidance Notes on transfer pricing in para 13.7, it is stated that two or more transactions can be said to be closely linked , if they emanate from common source, being order or contract or agreement or arrangement, and nature, characteristic and terms of such transactions substantially flow from said common source. following extract from said Guidance Notes is worthy of notice:- 13.7 factors referred to above are to be applied cumulatively in selecting most appropriate method. reference therein to terms best suited and most reliable measure indicates that most appropriate method will have to be selected after meticulous appraisal of facts and circumstances of international transaction. Further, selection of most appropriate method shall be for each particular international transaction. term transaction itself is defined in rule 10A(d) to include number of closely linked transactions. Therefore, though reference is to apply most appropriate method to each particular transaction, keeping in view, definition of term transaction , most appropriate method may be chosen for group of closely linked transactions Two or more transactions can be said to be linked when these transactions emanate from common source being order or contract or agreement or n arrangement and nature, characteristics and terms of these transactions are substantially flowing from said common source. For example, master purchase order is issued stating various terms and conditions and subsequently individuals orders are released for specific quantities. various purchase transactions are closely linked transactions. 13.8 It may be noted that in order to be closely linked transactions, it is not necessary that transactions need be identical or even similar. For example, collaboration agreement may provide for import of raw materials, sale of finished goods, provision of technical services and payment of royalty. Different methods may be chosen as most appropriate methods for each of above transactions when considered on standalone basis. However, under particular circumstances, one single method maybe chosen as most appropriate method covering 14 ITA No. 328/PN/2014, A.Y. 2009-10 all above transactions as same are closely linked. (Underlined for emphasis by us). 32. In this background, we may now examine facts of present case. primary activity of assessee is to manufacture material handling equipments viz. cranes and hoists. It is seen from documents placed in Paper Book that assessee enters into single negotiation with customers, which, inter-alia, includes manufacturing and supply of material handling equipment, provision of commissioning and installation services, etc. Though assessee raises different invoices for supply of equipments and separately for erection and commissioning charges, however, it is evident that negotiations for same are carried on at one go. In fact, at time of hearing, it was specifically queried from learned counsel as to whether assessee is undertaking installation/commissioning activities independent of its own-supplied material handling equipments. It was clarified that servicing and commissioning charges are earned only in relation to services performed for own supplied manufacture/assembled material handling equipments. aforesaid factual assertion is not disputed. Factually, it is activity of manufacturing/assembling of cranes etc. done by assessee and sales thereof, which brings into play activities of installation and commissioning of such products. Therefore, it is quite evident that such services are not independent but in-effect are as result of manufacturing of material handling equipment undertaken by assessee and as they arise from single negotiation with customers, source of all such transactions is also to be understood as common. 33. TPO in this regard has observed that assessee has invoiced separately for such activities and therefore, they have to be understood as different transactions. TPO has also observed in his order that in case where profits of each individual transaction can be segregated then aggregation of transaction is not intended by transfer pricing regulations. learned TPO has also referred to segmental profitability in this regard computed by assessee during course of transfer pricing proceedings before him. In our considered opinion, point made out by learned TPO is not justified, inasmuch as, separate invoicing of activity, flowing from singular contract/ negotiation, would not ipso facto lead to inference that they are individual/independent transactions. In-fact, it is nature and characteristic of activities which would be required to be analyzed having regard to facts and circumstances of each case as to whether 15 ITA No. 328/PN/2014, A.Y. 2009-10 they can be considered as individual/independent transactions or single transaction for purpose of transfer pricing regulation. In present case, as we have noted earlier, it is only on account of manufacturing activity that activity of commissioning and installation of equipment arises and pertinently all aforesaid activities are negotiated and contracted for at one instance. With regard to segmental profitability referred by Assessing Officer, position has been clarified by assessee. According to assessee, in financial statements affirmed by Auditors, activities have been clubbed together in accordance with Accounting Standards prescribed by ICAI. It was clarified that segmental profits were worked out by assessee only at asking of TPO during proceedings before him. learned counsel pointed out with reference to chart in this regard placed in Paper Book and submitted that segmental profitability was not computed on basis of any separately maintained records viz. books of account or vouchers but was computed by undertaking statistical exercise. costs were allocated as proportion of sales/revenues and not actual basis. In view of aforesaid fact situation, we do not find that availability of separate segmental profits in present case can be justifiable ground for TPO to say that transactions are not closely linked within meaning of Rule 10A(d) of Rules. Thus, activity of installation and commissioning/engineering services is closely linked with manufacturing activity and deserves to be aggregated and construed as single transaction for purposes of determining ALP as per method adopted. 34. In view of aforesaid discussion, in our opinion, approach of TPO, in out-rightly rejecting aggregation of all transactions itemized at 1 to 7 in para 7 is flawed having regard to facts and circumstances of case. Further, it is noticed from tabulation in para 7 of this order, that assessee is also rendering marketing services, technical know-how and professional services, etc., which have also been aggregated. For such activities no specific point has been made out by assessee as to why they can be classified as closely linked transactions for purposes of Rule 10A(d) of Rules. Considering entirety of facts and circumstances, we are of opinion that issue be revisited by AO/TPO in light of our aforesaid discussion. AO/TPO shall take into consideration pleas and material sought to be placed by assessee in light of aforesaid discussion and thereafter adopt combined transaction approach after considering each of transaction itemized at 1 to 7 as to whether 16 ITA No. 328/PN/2014, A.Y. 2009-10 same are to be bench marked after aggregation or not. Needless to say, Assessing Officer shall allow assessee reasonable opportunity to put forth material and submissions in support of its stand and only thereafter Assessing Officer shall pass order afresh on above aspect in accordance with law. Thus, on this Ground, assessee succeeds for statistical purposes. 9. ld. AR has also brought to our notice order passed by TPO while giving effect to order of Tribunal for assessment year 2007-08. relevant extract of TPO s order is as under : 7.4.4 On verification of ITAT Order above details it can be concluded that manufacturing and service income should be aggregated based on directions of ITAT. Further, with respect to trading activity it can be seen that correlation between manufacturing activity and customers for trading is only 60%. Also, except list of customers for trading no other documentary evidences were furnished by assessee company to substantiate its claim that trading activity should also be aggregated with that of manufacturing. In view of this as per ITAT s direction only manufacturing and service activities are aggregated and not trading activity for arriving at PLI of assessee company. 10. In assessment year 2008-09 same issue was raised by assessee in ITA No. 263/PN/2013. Co-ordinate Bench of Tribunal by placing reliance on decision rendered in assessment year2007-08 remitted matter back to file of Assessing Officer with similar directions. Both sides have admitted that there has been no change in facts and circumstances in assessment year under appeal. Thus, we are of considered view that this issue needs revisit to Assessing Officer. Assessing Officer is directed to decide issue in accordance with directions of Tribunal given in appeal of assessee for assessment year 2007-08. Accordingly, ground Nos. 3 and 4 raised in appeal by assessee are allowed for statistical purpose. 17 ITA No. 328/PN/2014, A.Y. 2009-10 11. In ground No. 5 assessee has assailed inclusion of Elecon Engineering Co. Ltd. in list of comparables. It has been contended that in assessment year 2008-09 Tribunal has excluded company from list of comparables. said company was initially included by assessee in list of comparables. However, in absence of segmental working capital details it is contended that company should be excluded from list of comparables. ld. AR also referred to financial statement of Elecon Engineering Co. Ltd. placed on record at page 1254 of Paper Book-III. We find that issue relating to inclusion of Elecon Engineering Co. Ltd. in list of comparables was raised before Tribunal in ITA No. 263/PN/2013 for assessment year 2008-09 in assessee s own case. Tribunal directed Assessing Officer to remove Elecon Enginering Co. Ltd. from list of comparables by observing as under : 9. Ld. Counsel for assessee submitted that although full details were given, AO did not allow any adjustment on ground that full details were not available. Referring to decision of Mumbai Bench of Tribunal in case of DHL Express Ltd. reported in 46 SOT 379, he submitted that if segmental results are not available or reliable, AO can remove that segment from comparable and proceed with other comparables which are submitted. He accordingly, submitted that he had no objection if Elecon Engineering Co. Ltd. is removed from list of comparables. Ld. DR has no objection for same. 10. We have considered rival arguments made by both sides. We find Mumbai Bench Tribunal in case of DHL Express (supra) has held that when direct comparables are available, there is no need to consider segmented results of any other company. We find in instant case, AO himself has observed that either relevant details for this segment must be considered or in case these details are not available, no adjustment should be made based on company as whole as adjustment computed will not be accurate and reliability will not be enhanced. He accordingly rejected adjustments computed for Elecon Engineering Company holding same as not appropriate. Having held so, AO considered Elecon Engineering Co. Ltd. for computing 18 ITA No. 328/PN/2014, A.Y. 2009-10 adjusted PLI as per page No.10 of assessment order. In view of above and respectfully following decision of Mumbai bench of Tribunal in case of DHL Express (cited supra), we direct AO to remove Elecon Engineering Co. from list of comparables and re- compute PLI. We hold and direct accordingly. This ground of assessee is accordingly, allowed for statistical purposes. In view of decision of Co-ordinate Bench on this issue, we direct Assessing Officer to exclude Elecon Engineering Co. Ltd. from list of comparables in impugned assessment year as well. Accordingly, ground No. 5 raised in appeal is allowed. 12. In ground No. 6 assessee has impugned action of authorities below in not granting adjustment on account of high import duty paid towards import of raw materials, components and spares. It has been contended that percentage of imported materials used by assessee is 57.82% as against 13.65% imported materials consumed by comparable companies. total cost of raw materials, spares and fixed consumed by assessee during period relevant to assessment year 2009-10 are to tune of `1,30,33,23,852/-. Ostensibly, additional cost incurred by assessee as compared to comparable companies on basic custom duty, landing charges, clearing and forwarding charges and insurance and freight is 9.77%. issue relating to grant of adjustment on account of import cost of raw materials, spares and cost was raised by assessee in appeal before Tribunal in assessment year 2006-07 in ITA No. 120/PN/2011 decided on 04-01-2012. Tribunal remitted issue back to file of TPO with direction to examine claim of assessee relating to import cost factor and eliminate difference, if any. relevant extract of findings of Tribunal are reproduce here-in-below : 19 ITA No. 328/PN/2014, A.Y. 2009-10 34. Ground 4 (b) has two limbs i.e. warranty claim and trade import cost of raw material and components and spares. Ld counsel mentioned that adjustments with regard to warranty claims are not pressed. Therefore, limited issue for adjudication out of this said sub ground (b) relates to adjustment on account of higher import cost. In this regard, Ld counsel submitted that assessee provided commercial reasons in relation to grant of adjustment on account of higher import cost of assessee vis vis comparable companies before TPO/DRP. relevant write up by assessee on this issue of import cost related adjustment read as under: company has 35.71% higher imports as compared to its comparable companies. Further, additional cost incurred by Company as compared to comparable companies on basis custom duty, landing charges, clearing and forwarding charges and insurance & freight will be around 18% to 21%. Summarized below are key figures/details Particulars Operating profit/total sales (adjusted for higher import 6.61% cost Arm s length Operating Margin of Comparables 7.18% (unadjusted) Adjustment after considering adjustment for high Rs.1,317,822 import cost (Rs 233,242,565* (7.18% - 6.61%=0.57%) appellant places reliance on rule 10B(3) of Rules and OECD Guidelines, which lays emphasis on adjustment for difference between transactions being compared which are likely to materially affect profit arising from such transactions in open market for which reasonably accurate adjustments are possible. Thus differences on account of higher imports and warranty provision have resulted into lower profit as compared to transactions in open market for which reasonable adjustment is possible. In view of above, appellant submits that margins of appellant be adjusted to take into consideration excess warranty claims and high import cost. 35. Elaborating above, Ld Counsel for assessee has mentioned that assessee imported components and spares from AE to tune of Rs 602.18 lakhs for manufacturing segment. It works out to nearly 40% of total imports ie Rs 1557.38 lakhs. Referring to comparables, it is brought to our notice that imports of comparables works out to merely 3.68% and therefore, there are differences and they have to 20 ITA No. 328/PN/2014, A.Y. 2009-10 eliminated by way of adjustments to be credible comparables to tested party s data. As per assessee, revised PLI after adjustment for excess import duty work out to around 6.6%, which falls in permitted range of +/-5%. Further, in support of above, Ld Counsel relied on various decisions for proposition that adjustment on account of import cost constitutes permissible ones. 36. In response to above, Ld. D.R. for revenue submitted that assessee has not made this sort of adjustments during proceedings before lower authorities. Further, Ld. D.R. argued stating that these expenses do not fall under category of extraordinary expenses which requires adjustments. Further, he also mentioned that adjustments, if any, in this regard should be made only on comparable cases of uncontrolled transactions. In this regard, CIT relied on provisions of rule 10B(e) of I.T. Rules, 1962. Further, he is of opinion that, if this is way adjustments are periodically claimed by assessee, there is need for analyzing every account of comparables relied upon by assessee. CIT also mentioned that comparables supplied to A.O are those which are selected by assessee himself. In these circumstances, assessee should not be permitted to ask for adjustments to already benchmarked ones. 37. We have heard parties and perused available material on records in light of second limb of ground 4(b). It is relevant mentioned that we have already analysed relevant provisions of Income Tax rules vis avis scope of adjustments in preceding paragraphs in context of adjustments on account of working capital . In principles, our findings on issue remain applicable to adjustments on account of import cost mentioned in ground 4(b) too. difference between AL Margin before and after said adjustments on account of import cost works out to 0.57% (7.18%- 6.61%). Revenue has not disputed said working of assessee. In these factual circumstances and in light of scope of adjustments discussed above, in our opinion and in principle, assessee should win on this ground too. One such decision relied upon by assessee s counsel supports our finding relates to decision of this bench of Tribunal in case of Skoda Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of order) that,- No doubt , higher import content of raw material by itself does not warrant adjustment in operating margins, as was held in Sony India (P) Ltd. s case (supra), but what is to be really seen is whether this high import content was necessitated by extraordinary circumstances 21 ITA No. 328/PN/2014, A.Y. 2009-10 beyond assessee s control. As was observed by Co-ordinate Bench of this Tribunal in case of E-Gain Communication (P) Ltd. (supra) differences which are likely to materially affect price, cost charged or paid in, or profit in open market are to be taken into consideration with idea to make reasonable and accurate adjustment to eliminate differences having material effect . We do not agree with AO that every time assessee pays higher import duty, it must be passed on to customers or it must be adjusted for in negotiating purchasing price. All these things could be relevant only when higher import content is part of business model which assessee has consciously chosen but then if it is business model to import SKD kits of cars, assemble it and sell it in market, that is certainly not business models of comparables that TPO has adopted in this case. adjustments then are required to be made for functionally differences. other way of looking at present situation is to accept that business model of assessee company and comparable companies are same and it is on account of initial stages of business that unusually high costs are incurred. adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in costs and profits in fit cases. We also do not agree with authorities below that onus is on assessee to get all such details of comparable concerns so as to make this comparison possible. assessee cannot be expected to get details and particulars which are not in public domain. In such situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. argument before us was that it was first year of assessee s operations and complete facilities ensuring reasonable indigenous raw material content was not in place. assessee s claim is that it was in these circumstances that assessee had to sell cars with such high import contents, and essentially high costs, while normal selling price of car was computed in light of costs as would apply when complete facilities of regular production are in place. None of these arguments were before any of authorities below. What was argued before AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on fallacy that operating profit margin for higher import duty is permissible merely because higher costs are incurred for inputs. That argument has been rejected by Co-ordinate Bench and we are in respectful agreement with views of our esteemed colleagues. This additional argument was not available before authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing TPO to examine all related relevant facts. We, therefore, deem it fit and proper to remit this matter to file of TPO for fresh adjudication in light of our above observations. 22 ITA No. 328/PN/2014, A.Y. 2009-10 38. perusal of impugned orders shows that above cited guidelines by way of decision of this bench of Tribunal in case of Skoda Auto India p Ltd (supra) were not available to revenue authorities. Therefore, we are of opinion, issue should be set aside to files of TPO with direction to examine claim of assessee relating to import cost factor and eliminate difference if any. However, TPO/AO/DRP shall see to it that difference in question is likely to materially affect price/profit in open market as envisaged in sub rule (3) of Rule 10B of Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto. 13. ld. DR has not been able to controvert findings of Tribunal. Thus, respectfully following decision of Co-ordinate Bench we remit this issue back to TPO to reconsider claim of assessee in light of directions given by Tribunal in assessment year 2006-07. Accordingly, ground No. 6 raised in appeal is allowed for statistical purpose. 14. ground No. 7 in appeal relates to grant of working capital adjustment. We find that Tribunal in assessment years 2006-07 and 2007-08 in assessee s own case has considered issue relating to grant of working capital adjustment. Tribunal in order for assessment year 2006-07 has considered issue of working capital adjustment in detail and has held as under : 33. We have already discussed in preceding paragraphs, this issue of adjustment on account of WC was raised for first time before Ld DRP and DRP has passively relied on order of TPO without realizing that said issue was never dealt with by TPO. Therefore, issue of granting of adjustment on account of working capital for eliminating of material effects and issue of, if such adjustment @ 3.41% constitutes that difference, if any, which is likely to materially affect price/profit margin, have not been examined. We find that there are written request of assessee to DRP to this extent and assessee furnished relevant figures, which are enough to adjudicate 23 ITA No. 328/PN/2014, A.Y. 2009-10 said request by AO/DRR. It is not case of DRP that above claims of assessee are incorrect. Alternatively, it is not request of revenue s DR that these said issues should be remitted for another round of proceedings before revenue authorities. In our opinion, existence of difference @ 3.41%, which is worth Rs 31,72,099/-, attributable to working capital ought to amount to material difference considering existing unadjusted operating margin of comparables at 7.18%. In these circumstances, we are of opinion that said working capital differences constitutes quantitatively likely to materially affect ALP / AL Operating Margin of comparable. Therefore, claims of assessee are allowed. Accordingly, grounds 4(a) is covered by cited decisions and is allowed pro tanto. 15. In assessment year 2007-08 Co-ordinate Bench of Tribunal followed decision rendered in preceding assessment year which has been reproduced here-in-above. Following decision of Co-ordinate Bench we allow claim of assessee on working capital adjustment in same terms. Thus, ground No. 7 raised in appeal is accepted. 16. In ground No. 8 assessee has assailed findings of TPO and DRP in not granting abnormal exchange rate appreciation adjustment. ld. AR of assessee has contended that there has been substantial fall in value of INR vis- -vis EURO. Since, assessee is using significant volume of imported inputs viz. raw materials, spares, consumables. assessee has given chart giving month wise exchange rate fluctuation of EURO vis- -vis INR in financial year 2008-09 and financial year 2007-08. same is reproduced here-in-below: Period Exchange Rate INR per EURO F.Y. 2008-09 F.Y. 2007-08 April 63.09 57.07 24 ITA No. 328/PN/2014, A.Y. 2009-10 May 65.39 55.27 June 66.69 54.77 July 67.65 55.45 August 64.49 55.60 September 65.67 56.07 October 66.89 56.28 November 63.69 57.89 December 66.88 57.49 January 66.42 57.88 February 63.65 58.47 March 67.91 62.45 Average 65.70 57.06 close look of chart show that in financial year 2007-08 average EURO rate was `57.06, whereas average rate of EURO in financial year 2008-09 increased to `65.70. Thus, there was increase of about 15% in value of EURO as against INR. In transfer pricing, adjustment has to be made for any abnormal change in exchange rate fluctuation. Abnormal fluctuation in exchange rate has impact on cost of inputs which are imported. Delhi Bench of Tribunal in case of Honda Trading Corporation India Private Limited Vs. ACIT (supra) has granted exchange rate fluctuation adjustment where value of INR has substantially fallen as compared to foreign currency of trade. relevant extract of findings of Tribunal are reproduced here-in-below : 19 On issue of adjustment of exchange fluctuation, loss incurred by assessee, we observe that it is well accepted principle of Transfer Pricing regulations to compare like with like and eliminate differences if any, by suitable adjustment. said principle clearly provides for adjustments in margins of enterprise entering into international transactions for any differences between such international transactions and transaction of comparables or between enterprise entering into internationals transactions and comparable companies. foreign exchange element 25 ITA No. 328/PN/2014, A.Y. 2009-10 also needs consideration. Rule 10B(3) of Income Tax Rules, 1962 provides that appropriate adjustment is required to be made on account of differences between controlled and uncontrolled transactions. This rule clearly stipulates that uncontrolled transaction shall be comparable to international transaction, if none of differences between transactions being compared, or between enterprises entering into such transactions are likely to materially affect price or cost charged or paid in, or profit arising from, such transactions in open market. This rule clearly stipulates that reasonably accurate adjustments can be made to eliminate material effects of such differences. 20. xxxxxxxxxx 21. xxxxxxxxxx 22. In case in hand, admittedly, average exchange rate of Thai Bhat during October, 2005 to March 2006 was 100 Thai Bhat equivalent to INR 110 and after consideration of said average exchange rate, price of sale of goods had to be agreed upon with customers. DR has not disputed point that during April 2006 to September 2006 at time of purchase, exchange rate of Thai Bhat was substantially increased and average exchange rate of Thai Bhatt was increased to 100 Thai Bhat = INR 119. Accordingly, we can not rule out and ignore this factual matrix emerged from fluctuation of foreign exchange rates that while prices of purchases and import made by appellant have increased, sale price of exported goods remained on lower side which is important element to materially affect price in open market. In this situation, we are inclined to hold that authorities below should have considered said difference due to foreign exchange rate fluctuation in favour of Thai Bhat and against INR and said difference has to be removed and margin thereon has to be adjusted for arriving at credible comparable through requisite adjustments. 17. ld. DR has not been able to controvert submissions made on behalf of assessee in respect of fluctuation in exchange rate. Thus, in view of facts of case, we are of considered opinion that this issue needs revisit to file of TPO for grant of exchange rate fluctuation. TPO after examine documents on record and 26 ITA No. 328/PN/2014, A.Y. 2009-10 exchange rate prevalent at time of international transaction carried out by assessee shall decided this issue de-novo. Accordingly, ground No. 8 raised in appeal by assessee is allowed for statistical purpose. 18. In ground No. 9 assessee has assailed action of TPO and DRP in re-characterization of expenditure incurred on purchase of software and information technology including payment of license fees as revenue expenditure, whereas assessee has claimed same as capital in nature. ld. AR of assessee has contended that assessee capitalized expenditure incurred on acquiring software etc. and has claimed depreciation on same. assessee has added software, license fee paid for acquiring software etc. in block of assets. Assessing Officer accepted treatment given by assessee in respect of expenditure incurred on acquiring software. However, TPO treated same as operating expenditure for purpose of computing operating margins. DRP in mechanical manner has also upheld findings of TPO in re-characterization of expenditure incurred on acquiring software. expenditure can either be classified as revenue or capital, but certainly it cannot be considered capital on one account and revenue on other in same assessment year. Thus, in our considered view this issue needs revisit to file of Assessing Officer to remove anomaly and treat expenditure incurred on acquisition of software under correct head. Accordingly, ground No. 9 raised in appeal is allowed for statistical purpose. 19. Ground Nos. 15, 16 and 17 relate to levy of interest u/s. 234A, 234B and 234C, respectively. levy of interest u/s. 234A, 234B and 27 ITA No. 328/PN/2014, A.Y. 2009-10 234C is mandatory and consequential. Thus, we do not find any merit in above grounds raised by assessee. Accordingly, same are dismissed being devoid of any merit. 20. In ground No. 18 assessee has impugned initiation of penalty u/s. 271(1)(c) of Act. We are of view that ground raised by assessee against initiation of penalty proceedings u/s. 271(1)(c) in assessment proceedings is pre-mature and thus, is liable to be dismissed. 21. In result, appeal of assessee is partly allowed in aforesaid terms. Order pronounced on Wednesday, 19th day of October, 2016. Sd/- Sd/- (Pradip Kumar Kedia) (Vikas Awasthy) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune; Dated : 19th October, 2016 RK Copy of Order forwarded to : 1. Appellant. 2. Respondent. 3. DRP, Pune 4. DIT, Transfer Pricing, Pune 5. DR, ITAT, B Bench, Pune. 6. Guard File. // // True Copy// BY ORDER, Private Secretary, ITAT, Pune Demag Cranes & Components (India) Private Limited v. Deputy Commissioner of Income-tax, Circle 1(2), Pune
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