Income Tax Appellate Tribunal - Pune
Bobst India Pvt. Ltd.,, Pune vs Acit, Circle 1(1), Pune on 3 February, 2017
आयकर अपील य अ धकरण]] iq.ks यायपीठ "ए" iq.ks म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
सु ी सुषमा चावला, या यक सद य
एवं ी आर. के. पांडा, लेखा सद य के सम#
BEFORE MS. SUSHMA CHOWLA, JM
AND SHRI R.K. PANDA, AM
आयकर अपील सं. / ITA No.2090/PUN/2012
नधा%रण वष% / Assessment Year : 2008-09
M/s. Bobst India Private Limited, .......... अपीलाथ /
Plot No.82, 126-132, Appellant
Village Kasar Amboli,
Post Ambadvet, Ghotavade Road,
Tal. Mulshi, Dist. Pune - 412 108
PAN : AAACB7295F
बनाम v/s
ACIT, Circle-1(1), Pune .......... यथ /
Respondent
अपीलाथ क ओर से / Appellant by : Shri Rajendra Agiwal
यथ क ओर से / Respondent by : Shri S.K. Rastogi
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing :07.11.2016 Date of Pronouncement: 03.02.2017
आदे श / ORDER
PER R.K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 18-09-2012 passed u/s.143(3) r.w.s. 144C(13) of the Act by the Addl.CIT, Circle-1(1), Pune relating to Assessment Year 2008-09.
2. Facts of the case, in brief, are that the assessee is a Private Limited company engaged in the business of manufacturing and trading in packaging equipment and reconditioning of packaging equipment and machines. The assessee filed its return of income on 28-09-2008 disclosing total income at Rs.2,52,17,110/-. The Assessing Officer made a reference u/s.92CA(1) of the I.T. Act, 1961 2 ITA No.2090/PUN/2012 to the TPO for computation of ALP in relation to the international transaction undertaken by the assessee.
3. The TPO noted that Bobst India Pvt. Ltd. is a 100% affiliate of the Bobst group SA, Lausanne, Switzerland. Boobst Group headquartered in Switzerland is the world's foremost supplier of products and services for the folding carton, corrugated board and flexible packaging industries. Bobst SA manufactures mainly production lines for the printing and converting of folding carton and the corrugated board for packaging products, together with electronic equipment for print to print register control and other aspects of quality assurance. The Bobst Group is made up of more than 30 affiliated companies around the globe comprising of Bobst SA, Martin, Schiavi SPA etc.
4. The TPO further noted that the assessee during the impugned assessment year has undertaken the following international transactions as per section 92CA of the I.T. Act :
S.No. Description of transaction Amount Method used 1 Purchase of components for 5,11,37,775 TNMM manufacturing machines 2 Sale of finished goods 20,87,42,159 TNMM 3 Import of capital assets 1,87,492 TNMM 4 Recovery of Freight & Clearing 1,29,86,846 5 Import of spares for trading 43,93,305 TNMM 6 Receipt of commission income 5,59,00,724 TNMM 7 Receipt in respect of customer 2,88,76,184 TNMM support services provided on behalf of AE-Bobst Gp 8 Export of spares to AEs 26,240 TNMM 9 Amount received for supply of 16,15,747 TNMM warranty spares to third parties on behalf of Bobst Gp 10 Import of capital assets from 3,55,805 TNMM Bobst Gp 11 Recovery of exhibition related costs in 5,61,806 --
agreed proportion 3 ITA No.2090/PUN/2012 12 Receipt of reimbursement from AEs 44,45,926 --
for cost incurred by Indian Company 13 Payment of reimbursement by Indian 4,86,275 --
Company for cost incurred by AEs Total 36,97,43,284
5. After examining the detail of benchmarking done by the assessee the TPO issued a detailed show cause notice proposing adjustment to its international transactions. Relevant portion of the notice has been reproduced at pages 3 to 12 of the order passed u/s.92CA(3). In response to the show cause notice the assessee filed a detailed reply justifying the TP study undertaken by it. The assessee also gave the following details to the TPO :
"1. Transactions relating to domestic operations :
The international transactions of Bobst India in relation to the domestic operations for F.Y.2007-08 are as under :
Sr. Description of the International Amount (Rs.) Percentage of
No. Transactions each
international
transaction as
compared to total
international
transaction value
under domestic
operations
Transactions pertaining to domestic operations 1 Import of spares for trading in India from 4,393,305 4.79& Bobst Group entities 2 Amount received in respect of support 28,876,184 31.48% services provided to customers on behalf of Bobst Group entities 3 Receipt of commission for marketing the 55,900,724 60.94% machines and spares manufactured by Bobst Group entities 4 Export of spares to Bobst group entities 26,240 0.03% 5 Amount received by Bobst Group entities for 1,615,747 1.76% supply of warranty spares to third party customers on their behalf 6 Import of capital assets from Bobst Group 355,805 0.39% entities 7 Recovery of exhibition related costs 561,806 0.61% TOTAL 91,729,811 100% 4 ITA No.2090/PUN/2012
6. It was submitted that receipt of commission and rendering of support services are the major activities constituting approximately 92% of the total international transactions under domestic operations. All other international transactions are incidental and ancillary to these transactions.
7. From the various details furnished by the assessee, the TPO noted that all the International Transactions undertaken by the company have been analyzed under two segments viz., Transactions relating to EOU operations, and Domestic Tariff Area Operations (DTA) for benchmarking. The assessee had identified transactional net margin method ('TNMM') as the most appropriate method to benchmark international transactions pertaining to both EOU and DTA operations. Operating Profit / Operating Cost ('OP/OC') was used as the profit level indicator ('PLI') for TNMM analysis of both EOU and domestic operations, On application of TNMM, the assessee determined that its international transactions pertaining to both EOU and domestic operations were conducted at arm's length.
8. With regard to EOU operations of Bobst India, the TPO considered Rollatainers as comparable and rejected Polymer Papers Limited ('Polymer Papers'). Further, the TPO considered International Combustion (India) Limited ('International Combustion') as comparable using company wise data rather than considering data for 'gear box and geared motor drive system' as done by the assessee. Further, while computing the operating margin of the assessee from EOU operations, the TPO considered certain expenses incurred by the assessee on behalf of its AEs as part of operating cost and subsequent recovery as operating income.
5ITA No.2090/PUN/2012
9. With regard to the domestic operations, the TPO did not accept the approach followed by the assessee for benchmarking international transaction following combined transaction approach using TNMM as the most appropriate method. Instead, the TPO benchmarked international transaction of the assessee pertaining to marketing of machines by comparing the same with marketing of spares and proposed an upward adjustment in relation to the domestic operations of the assessee.
10. The TPO further observed that this issue had been a subject matter of TP adjustment in earlier assessment years. All the objections of the assessee made for A.Y. 2008-09 were also considered by the DRP for A.Y. 2007-08 and discussed at length in their order dated 25-08-2011. DRP had given detailed reasons as to why the objections raised by the assessee are not acceptable. He observed that all the objections raised by the assessee in the present assessment year are not different from what was considered in the earlier years. He, therefore, held that there is no reason to deviate from the view taken by the TPO in earlier assessment years. The TPO reproduced the reasons given by his predecessor in earlier years for not accepting the submissions made by the assessee.
11. Consequently, the TPO proposed an upward adjustment of Rs.88,544,000/- to the domestic operations and Rs.15,238,300/- to EOU operations of the assessee by observing as under :
"Conclusion :
13.1 In view of the facts of the case, submission of the assessee and deliberations as above, the benchmarking the assessee's international transaction falling under the manufacturing activity EOU segment is required to be done following TNMM and taking comparables as have been discussed above in Para 11. Accordingly an adjustment of an amount corresponding to the difference in the arithmetic mean of PLIs of 6 ITA No.2090/PUN/2012 the proposed set of comparables at 11.74% and that of assessee's EOU segment being at 5.45%, is made to the assessee's international transactions falling under the EOU manufacturing segment. The adjustment is worked out as under :
13.2 The Net Sales of the manufacturing activity annexure-2 of assessee's submission dated 30-09-2011 is Rs.25,02,18,415/-.
The difference in the arithmetic mean of operating profit margin of comparable companies and that of the assessee for the manufacturing activity 11.74-5.65=6.09%. Adjustment required = 6.09 x 25,02,18,415 = Rs.1,52,38,300/-.
10013.3 In view of the facts of the case, discussion as above, adjustment of Rs.1,52,38,300/- is made to international transactions falling under the EOU manufacturing activity of assessee, to arrive at the arm's length price of these international transactions. Consequent to this adjustment, the income of the assessee shall be increased by Rs.1,52,38,300/-. 13.3 In respect of commission income from AEs, as discussed in Para 8 and 9 of this order, adjustment in respect of international transaction relating to receipt of sales commission on sale of machine, is taken at 15% instead of 5%. The corresponding adjustment works out to Rs.8,85,44,000/-."
The Assessing Officer thereafter passed the order u/s.143(3) r.w.s.144C(1) on 28-11-2011 making addition of Rs.8,85,44,000/- only as against Rs.10,37,82,300/- proposed by the TPO.
12. The assessee approached the DRP challenging the proposed upward adjustment of Rs.8,85,40,000/- to the value of the international transactions pertaining to receipt of commission for sale of machines entered into by the assessee forming part of its domestic operations. The assessee also submitted before the DRP that the TPO and the Assessing Officer have erred in not agreeing to the TP study concluded by the assessee for benchmarking the international transactions pertaining to domestic operations of the assessee which were benchmarked using combined transaction approach under TNMM.
7ITA No.2090/PUN/2012
13. It was argued that the net margin earned by Bobst India for domestic operations excluding trading activity at 43% of cost whereas the weighted average margin of comparables engaged in providing business support services is 15.28% and therefore the transactions pertaining to domestic operations excluding trading activity is at arm's length . It was submitted that the assessee has done a conservative computation which should have been accepted by the TPO rather than benchmarking the international transactions of the assessee using controlled transactions to assessee itself which is not acceptable under Indian Transfer Pricing Regulation.
14. Relying on Rule 10B(2), 10B(3) and 10B(4) of the I.T. Rules it was contended that the comparability adopted by the TPO is erroneous as the transaction entered into by the tested party should be compared with uncontrolled transaction and such uncontrolled transactions do not include transactions between the AEs. The assessee submitted that TPO has himself compared commission earned by the assessee from marketing of machines with commission earned by the assessee from marketing of spares. The turnover earned by the AEs of the assessee from sale of spare is also few crores only, i.e. Rs.8.14 crores whereas the TPO has considered the same as a comparable to the international transaction of the assessee pertaining to commission earned from marketing of machines. It was submitted that assessee has provided all the relevant details regarding third party transactions.
15. During the proceedings before the DRP it was seen by the DRP that TPO has made two additions, i.e. (1) on account of EOU manufacturing activity - Rs.1,52,38,300 and (2) on account of receipt 8 ITA No.2090/PUN/2012 of sale commission on sale of machines at Rs.8,85,40,000. However, in the draft assessment order the Assessing Officer has made only one addition which is on account of receipt of sale commission on sale of machines at Rs.8,85,40,000 and missed the addition on account of EOU manufacturing activity at Rs.1,52,38,300/- as per provisions of section 92CA(4) of the Act. Since the order passed by the TPO is binding on the Assessing Officer, therefore, the DRP issued an enhancement notice to the assessee by proposing to incorporate the TP adjustment in relation to EOU operation to the total income of the assessee. In response to the same, the assessee filed its objections, the gist of which has been summarized by the DRP at Para 12.3 of the order and which reads as under :
"1. The Ld. TPO has erred on the facts and in the circumstances of the case in not considering the financial data provided by the appellant and approach adopted in Transfer Pricing study report from TNMM analysis in relation to bench marking the international transaction pertaining to EOU operation.
2. The TPO has erred by not considering multiple year data and contemporaneous data for determining the Arm's Length Price in relation to international transaction pertaining to EOU operation,
3. The TPO has erred by concluding that Rollatainers Ltd., in comparable to the appellant and should be considered for arriving at the Arm's Length Price in relation to international transaction pertaining to EOU operation.
4. The TPO has erred by concluding that International Combustion India Ltd., is comparable to appellant on company vide basis and not on segmental basis as done by the appellant.
5. The TPO has erred vide concluding that Polymer Paper Ltd. is not comparable to the appellant, hence, should be excluded vide arriving at the Arm's Length Price in relation to international transaction pertaining to EOU operation,
6. The TPO has compared entities having different working capital structure with the appellants operations which has different working capital requirement without making any adjustment for the differences between the working capital of comparables vis-a-vis the appellant.9 ITA No.2090/PUN/2012
7. The TPO has raised in completing the operating margin of appellant including expenses recovered from Bobst group entities in the operating income rather than appropriately relating of the same from the relevant expenses to which they were debited."
16. After considering the submission made by the assessee the DRP rejected the various objections raised before them except with a direction to grant deduction u/s.10B properly.
17. The Assessing Officer thereafter passed order u/s.143(3) r.w.s. 144C(13) making addition of Rs.10,37,82,300/- to the Arms' Length Price of the international transactions on account of the following :
a. Adjustment in respect of sales commission on sale of machines Rs.8,85,44,000 b. Adjustment in respect of EOU manufacturing activity Rs.1,52,38,300
---------------------
Total Rs.10,37,82,300
---------------------
18. Aggrieved with such order of the DRP the assessee is in appeal before us with the following grounds :
"Based on the facts and circumstances of the case, Bobst India Private Limited ('Appellant') respectfully craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income Tax- Circle 1(1) ('learned AO') under section 143(3) of Income-tax Act, 1961 ('the Act') dated 18 September 2012 (received on 2 October 2012) in pursuance of the directions issued by Dispute Resolution Panel ('Hon'ble DRP'), Pune, under section 253(1)(d) of the Act on the following grounds, which are independent and without prejudice to each other:
On the facts and in the circumstances of the case and in law, the Hon'ble DRP and consequentially the learned AO have in respect of transfer pricing adjustment erred as under:
1. General ground challenging the transfer pricing adjustment of Rs. 10,37,82,300.
Erred in making transfer pricing adjustment to the international transactions pertaining to Export Oriented Unit ('EOU') operations and domestic operations in relation to receipt of commission from marketing of machines and spares of its associated enterprises ('AEs').10 ITA No.2090/PUN/2012
2. General ground regarding non acceptance of financial data and analysis provided in the transfer pricing study report.
Erred by not accepting the financial data and approach adopted by the Appellant for benchmarking its international transactions pertaining to EOU operations provided by the Appellant in its transfer pricing study report and by not agreeing to the transfer pricing study conducted for benchmarking the international transactions pertaining to domestic operations using combined transaction approach using TNMM as the most appropriate method.
International transactions pertaining to EOU operations
3. In appropriate use of single year data by the learned AO Erred in considering the operating margins earned by the comparable companies based on the financial data pertaining only to financial year ended 31 March 2008 and rejecting the financial data of comparable companies for prior two years (31 March 2007 and 31 March 2006).
4. Inappropriate use of non contemporaneous data by the learned AO Erred in computing the arm's length price using the financial information of comparable companies available at the time of assessment proceedings, although such information was not available at the time when the Appellant complied with the transfer pricing regulations.
5. Inappropriately considering Rollatainers Limited as comparable for FY 2007-08 Without prejudice to the above grounds of appeal, erred by concluding that Rollatainers Limited is comparable to the Appellant and hence should be considered while computing the operating margins of comparable companies for arriving at the arm's length price in relation to the international transactions pertaining to EOU operations.
6. Inappropriately considering International Combustion (India) Limited as comparable on a company wide basis for FY 2007-08.
Without prejudice to the above grounds of appeal, erred by concluding that International Combustion (India) Limited is comparable to the Appellant on a company wide basis and hence companywide operating margins should be considered for arriving at the arm's length price in relation to the international transactions pertaining to EOU operations.
7. Inappropriately considering Polymer Papers Limited as not comparable for FY 2007-08.
11ITA No.2090/PUN/2012
Without prejudice to the above grounds of appeal, erred by concluding that Polymer Papers Limited is not comparable to the Appellant and hence should not be considered while computing the operating margins of comparable companies for arriving at the arm's length price in relation to the international transactions pertaining to EOU operations.
8. Erroneously comparing entities having different working capital structure with the Appellant's operations which has different working capital requirements.
Erred by comparing entices having different working capital structure with the Appellant's EOU operations having different working capital requirements, without making any adjustment for differences between the working capital of com parables vis- a-vis the Appellant.
9. Erroneously computing the operating margins of the Appellant Erred in computing the operating margins of the Appellant by including expenses recovered from Bobst Group entities (incurred on their behalf) in the operating income rather than appropriately netting off the same from the relevant expense head to which they were debited.
10. Inappropriate computation of transfer pricing adjustment by computing the same using incorrect profit level indicator Erred in computing the transfer pricing adjustment in relation to the EOU operations of the Appellant for A Y 2008-09 by computing the same on revised operating income of the Appellant rather than the revised operating cost since the profit level indicator adopted by the Appellant and the learned transfer pricing officer ('learned TPO') is operating profit operating cost. International transactions pertaining to domestic operations
11. Non consideration of submission of the Appellant to benchmark international transactions pertaining to domestic operations excluding trading activities.
Erred on the facts and in law by not considering the Appellant's contention made on a without prejudice basis of benchmarking the international transactions pertaining to domestic operations excluding trading activities, which as proposed by learned TPO cannot be categorized under business support services, using TNMM as most appropriate method.
12. Erroneous comparison of commission from marketing of machines with the commission from marketing of spares. 12 ITA No.2090/PUN/2012
Erred by comparing the international transaction pertaining to receipt of commission from marketing of Bobst Group's machines with the international transaction pertaining to receipt of commission from marketing of Bobst Group's spares i.e. controlled transaction of the Appellant.
13. Non consideration of the details in relation to internal Comparable Uncontrolled Price ('CUP') submitted by the Appellant. Erred on the facts and in law by not considering the Appellant's submission made on a without prejudice basis providing details of commission earned by the Appellant from overseas third party in relation to marketing of machines in India on behalf of overseas third party which should be considered as valid internal CUP for the purpose of benchmarking international transaction pertaining to receipt of commission from marketing of machines.
Other grounds
14. Short grant of Tax Deducted at Source ('TDS') credit by Rs. 3,63,997.
The learned AO while computing the tax demand has erred in granting TDS credit (as a part of pre-paid taxes) of Rs.6,10,818 as against an amount of Rs. 9,73,815 claimed by the Appellant in its return of income, without explaining indicating the reason for the same.
15. Erroneous levy of interest under section 234B, 234C and 234D of the Act.
Without prejudice to the grounds above, if the transfer pricing adjustment is sustained then the learned AO has erred in levying interest under section 234B, 234C and 234D of the Act, without considering the fact that the addition on account of transfer pricing adjustment is due to difference of opinion and as at the due date of payment of advance tax by no means the Appellant could have estimated such adjustments and consequential tax on such adjustment.
16. Excess levy of interest under section 234B of the Act by Rs. 14,84,675 Without prejudice to the grounds above, the learned AO while computing the tax demand has erred in computing interest under section 234B(2) r.w.s 140A of the Act for period after payment of self assessment tax as the learned AO has reduced amount of interest payable upto date of payment of self assessment tax under section 234B as per the assessed income as against the amount of interest actually paid with payment of self assessment tax as per the return of income under section 140A of the Act.
17. Excess levy of interest under section 234C of the Act by Rs. 2,42,204.
13ITA No.2090/PUN/2012
Without prejudice to the grounds above, the learned AO while computing the tax demand has erred in considering interest under section 234C of Rs. 4,02,006 instead of interest under the said section as per return of income of Rs. 159,802.
18. Erroneous levy of penalty under section 271(1)(c) of the Act Without prejudice to the grounds above, if the transfer pricing adjustment is sustained then the learned AO has erred in proposing to levy penalty under section 271(1)(c) of the Act, without considering the fact that adjustment to transfer price is just on account of difference of opinion and consequently resulted in an adjustment to income.
The Appellant Craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Ld. AO to decide this appeal according to law."
19. The Ld. Counsel for the assessee at the time hearing did not press grounds of appeal No.3,4,6,7,11 and 13 for which the Ld. Departmental Representative has no objection. Accordingly, the above grounds by the assessee are dismissed as 'not pressed'. Grounds of appeal No.1 and 2 being general in nature are dismissed.
20. So far as Ground of appeal No.5 is concerned the same relates to exclusion of Rollatainers Limited as comparable for A.Y. 2007-08.
21. The Ld. Counsel for the assessee submitted that assessee in its TP study has included Rollatainers Limited as comparable by following multiple year data. The same was included during A.Y. 2006-07 and 2007-08 also as a comparable. During the course of TP study proceedings for the impugned assessment year when the assessee came to know that Rollatainers Limited is not comparable because (a) it has substantial related party transactions during F.Y. 2007-08 which is at 48.57% (b) it is a sick company and has been referred to BIFR and (c) it is following different financial year, therefore, it should be excluded. However, the TPO rejected the claim 14 ITA No.2090/PUN/2012 of the assessee on the ground that assessee itself has included the same as a comparable. Further, the company was also sick in the preceding year and there are no purchases from related party in the manufacturing concern. The Ld. Counsel for the assessee submitted that when the assessee included certain company as comparable but subsequently it was pointed out that the same is not comparable by giving cogent reasons the same should be excluded from the list of comparables by the TPO.
22. Referring to the decision of the Pune Bench of the Tribunal in the case of Barclays Technology Centre Vs. ACIT vide ITA No.2279/PUN/2012 order dated 28-01-2015 for A.Y. 2008-09 the Ld. Counsel for the assessee drew the attention of the Bench to Para 14 of the order and submitted that the Tribunal in the said decision has held that the plea of the assessee cannot be shut out merely because the said concern was initially adopted by the assessee as comparable in its TP study. However, it was pointed out by the Tribunal that the cause and justification for its exclusion is liable to be demonstrated by the assessee. Accordingly, Infosys Technology Ltd. was directed to be excluded from the final set of comparables. He submitted that Rollatainers Limited is a sick company since it has been referred to the BIFR and has negative net worth for continuous 3 years, i.e. F.Yrs. 2005-06 to 2007-08. For the above proposition he referred to Pages 359 and 360 of the paper book No.1 and pages 92 to 94 and 100 of the TPOs order for A.Y. 2008-09.
23. Referring to the following decisions he submitted that companies having negative net worth cannot be considered as comparable :
15ITA No.2090/PUN/2012
1. Quark Systems Pvt. Ltd. Vs. ITO - ITA No.115/Chd/2009
2. CRM Services India Pvt. Ltd. - ITA No.4068/Del/2009
3. Mitsui OSK Maritime India Pvt. Ltd. Vs. DCIT -ITA No.6397/Mum/2006
24. Referring to the following decisions the Ld. Counsel for the assessee submitted that companies with significant related party transactions cannot be taken as comparable :
1. Starent Networks (India) Pvt. Ltd. Vs. DCIT -ITA No.1350/PN/2010
2. ACIT Vs. Symantec Software Solutions Pvt. Ltd. -ITA No.8673/Mum/2011
3. Global Logic India Pvt. Ltd. Vs. DCIT - ITA No.6082/Del/2010
4. DCIT Vs. Deloitte Consulting India Pvt. Ltd. -ITA No.1082/Hyd/2010
5. DCIT Vs. Sony India Pvt. Ltd. - ITA No.448/Del/2008
6. Avaya India Pvt. Ltd. Vs. ACIT - ITA No.5150/Del/2010
25. He submitted that Rollatainers Limited has different financial year, i.e. year ending 30th September as compared to 31st March adopted by the assessee. Referring to the following decisions he submitted that companies with different financial year ending cannot be considered as comparable :
1. Honeywell Automation India Pvt. Ltd. Vs. DCIT -ITA No.4/PN/08 (Pune)
2. Hapag Lloyd Global Services Pvt. Ltd. Vs. ACIT -ITA No.8499/Mum/2010 (Mumbai)
3. Sandstone Capital Advisors Pvt. Ltd. Vs. ACIT -ITA No.6315/Mum/2012 (Mumbai)
26. Without prejudice to the above, the Ld. Counsel for the assessee submitted that even if Rollatainers Limited is to be considered as comparable, then the operating margin based on financial year data for the year ended 30-09-2007 should be considered which is 6.30% as against 13.32% for the year ended 30- 09-2008 which has been inadvertently considered by the TPO. He 16 ITA No.2090/PUN/2012 submitted that if the same is accepted then the assessee falls within +/-5%.
27. Referring to page 349 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the computation of operating margin which comes to 6.30%. Referring to page 11 of the order of the TPO he submitted that the TPO has considered the PLI at 13.32% by considering 30-09-2008 as the year ending. Referring to page 182 of the paper book he drew the attention of the Bench to the segmental reporting of Rollatainers Limited and submitted that even if year ending is taken as 30-09-2008, then also the margin is 10.18%. However, for the purpose of comparison, the TPO should adopt 30-09-2007 as the year ending which comes to 6.30%. He accordingly submitted that the PLI of Rollatainers Limited should be considered at 6.30%.
28. The Ld. Departmental Representative on the other hand heavily relied on the order of the TPO and DRP. He submitted that once the assessee has included the company as comparable in its TP study report he cannot request now for exclusion of the same on the ground that the comparable company is a sick company and is following different financial year or on the issue of related party transaction. He submitted that in the preceding years also the company was a sick company and was following different financial year. Further, there are no purchases from Related Parties in the manufacturing concern. Therefore, the arguments advanced by the assessee cannot be accepted.
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29. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer/TPO and DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has included Rollatainers Limited as comparable following multiple year data. The said company was also considered in the 2 preceding years as comparable. However, during the TP assessment proceedings for the impugned assessment year, the assessee pointed out to the TPO that Rollatainers Limited should be excluded from the list of comparables since it is a sick company, it is following different financial year and it has got significant related party transactions. We find the TPO rejected the argument advanced by the assessee on the ground that assessee itself had included the said company in its TP study report and the company was also a sick company in the preceding assessment year when the assessee had included the same as a comparable.
30. It is the submission of the Ld. Counsel for the assessee that even if the assessee has included the same in its TP study report as comparable, there is no estoppel to exclude the same from the list of this comparables. It is also his argument that when the assessee had included the same as comparable in the TP study report but subsequently it is pointed out that it is not comparable due to cogent reasons, then in view of the decision of Pune Bench of the Tribunal in the case of Barclays Technology Centre India Pvt. Ltd. (supra), the plea of the assessee for exclusion of the same cannot be shut out merely because the said concern was initially adopted by the assessee as comparable in its TP study report.
18ITA No.2090/PUN/2012
31. We find merit in the above arguments of the ld. Counsel for the assessee. From a perusal of pages 358 and 359 of the paper book we find the assessee had objected before the DRP for exclusion of Rollatainers Limited as comparable on the ground that the percentage of related party transaction is 48.57%.
32. We find the Pune Bench of the Tribunal in the case of Starent Networks (India) Pvt. Ltd.(supra) has held that companies having related party transaction exceeding 25% cannot be held as comparable. The relevant observation of the Tribunal at para 24 reads as under :
"24. Apart from the aforesaid, the appellant has assailed the addition on other aspects also. One of the issue raised is regarding the inclusion of Compucom Software Ltd. as a comparable by the TPO. Such inclusion is assailed on the ground that the related party transactions of this Company exceeded 25% of the total revenues for financial year 2005-
06. As per the workings placed at pages 244-245 of the Paper Book-II, it is reflected that the related party transactions of this Company are 28.78%, which is in excess of 25%. It has been pointed out that there is an apparent contradiction in the approach of the TPO inasmuch as he has rejected certain companies considered comparable by the assessee, which as per the TPO had substantial related party transactions. Considering the case set-up by the assessee, in our view, the filter set-up by the assessee to exclude companies having related party transactions in excess of 25% cannot be considered as unreasonable. Moreover, we do not find any reason for the Assessing Officer to do away with the filter of related party transactions exceeding 25% adopted by the assessee, on a selective basis. Ostensibly, the aforesaid filter has been accepted by the TPO in principle, but has been ignored while reviewing the case of Compucom Software Ltd. Clearly, the said filter has escaped its application at the hands of the TPO while including Compucom Software Ltd. as a comparable. Therefore, in the instant case, we direct the TPO to exclude Compucom Software Ltd. from the final set of comparables. The assessee succeeds on this aspect."
33. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Symantec Software Solutions Pvt. Ltd. (supra), Delhi Bench of the Tribunal in the case of Global Logic India Pvt. Ltd ( supra), Hyderabad Bench of the Tribunal in the case of 19 ITA No.2090/PUN/2012 Deloitte Consulting India Pvt. Ltd. supra). The various other decisions relied on by the Ld. counsel for the assessee on this issue also support its case. In view of the above discussion Rollatainers Limited cannot be considered as a comparable on account of significant related party transactions.
34. We further find Rollatainers Limited has different financial year ending as compared to that of the assessee. A perusal of the Director's report and Auditor's report of Rollatainers Limited, copy of which is placed at pages 156 to 214, show that the accounting year ending for the above company is 30th September whereas the accounting year ending for the assessee company is 31st March. Under these circumstances, it has to be seen as to whether Rollatainers Limited, which is following a different financial year than the financial year followed by the assessee company, can be considered as comparable or not.
35. We find the Pune Bench of the Tribunal in the case of Honeywell Automation India Pvt. Ltd. (supra) has held that date for the relevant financial year in which the international transaction took place is to be considered for comparability analysis. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Sandstone Capital Advisors Pvt. Ltd. (Supra) where the Tribunal has observed as under :
"10. We have considered the rival submissions and relevant material on record. The TPO has rejected this comparable because the financial data for the Financial Year 2007-08 were not available in the public domain and hence, it was held that this company is not a suitable comparable. There is no dispute that the data furnished by the assessee are regarding the financial results as on 30.6.2007. Therefore, as far as the financial year 2007-08 is concerned, the data available were only for 3 months.20 ITA No.2090/PUN/2012
10.1 As per Rule 10B(4), the data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Therefore, it is mandatory for the purpose of comparing the data of an uncontrolled transaction with an international transaction that the same should be relating to the financial year in which the international transaction has been entered into. The information, data and documents should be contemporaneous.
10.2 Undisputedly, the final accounts of Arix Consultants Pvt Ltd are prepared on 30th June; therefore, the objection raised by the TPO has merits. The Pune Benches of the Tribunal in the case of Honeywell Automation India Ltd in ITA No.4/PN/08 vide order dated 10th Feb 2009 has also taken a similar view.
10.3 Apart from this, as it has been fairly conceded by the Ld Sr counsel for the assessee that there are related party transaction in the case of Arix Consultants Pvt Ltd as it is evident from the note on account at page 89 of the paper book. Therefore, in view of the fact that this company is having related party transactions, the same cannot be considered as a proper comparable."
36. We further find the Hon'ble Bombay High Court in a recent decision in the case of CIT Vs. PTC Software India Pvt. Ltd. in ITA No.732 of 2014 order dated 26-09-2016 while deciding an identical issue has observed as under :
"11. Re.Question (iii) :
(a) The Assessing Officer on the basis of the order of the TPO included M/s. Transworks Information Services Ltd. (Transworks Ltd.) in his comparability analysis. The grievance of the respondent assessee before the Tribunal was that Transwork Ltd. cannot be comparable as the respondent assessee's financial period is from Ist April, 2006 to 31st March, 2007 while the financial period in respect of the comparable is from Ist July, 2006 to 30th June, 2007. This grievance based on fact was not disputed by the Revenue before the Tribunal or even before us. In terms of Rule 10B(4) of the Income Tax Rules, 1962, the analysis for comparison shall be on the data relating to the financial year in which the international transaction has been entered into. In the above view, the Tribunal held that as the financial period during which the international transaction was entered into is different, M/s. Transwork Ltd. could not be treated as comparable and thus not includable.21 ITA No.2090/PUN/2012
(b) We find that the provisions of section 10B(4) of the Rules are clear in as much as it obliges that the data to be used for comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party. In fact, this principle/mandate was applied by the TPO while considering M/s.Power Soft Global Services Ltd. as a comparable because it had a financial year ending in September, 2006 and not 31st March, 2007 as in the case of respondent assessee. The same yardstick ought to have been applied by the TPO while considering whether Transwork Ltd. was comparable. The submission on behalf of the Revenue that the mandate of Rule 10B of the Rules can be ignored as the difference is only of three months is without any basis. No such liberty is granted in terms of Rule 10B(4) of the Rules."
37. Since in the instant case the financial year of Rollatainers Limited is different from that of the assessee company, therefore, in view of the above discussion and following the decision of Hon'ble Bombay High Court in the case of PTC Software (I) Pvt. Ltd. (supra) we hold that Rollatainers Limited cannot be considered as comparable and has to be excluded from the list of comparables.
38. As regards the objection of the revenue that the assessee itself has considered Rollatainers Limited as comparable in its TP study report and therefore now the assessee cannot request for exclusion of the same is concerned, we find the arguments advanced by the Departmental Representative on this issue is not tenable. Once an assessee includes a company as comparable but subsequently points out that the said company is not comparable because of justifiable reasons such plea of the assessee cannot be shut out merely because the said concern was initially adopted by the assessee as comparable in its TP study.
39. We find the Pune Bench of the Tribunal in the case of Barclays Technology Centre India Pvt. Ltd.(Supra) while deciding such argument has observed as under :
22ITA No.2090/PUN/2012
"14. We have carefully considered the rival submissions. In so far as the objection of the Revenue to the effect that the said concern was initially included by the assessee in its Transfer Pricing Study as a comparable is concerned, the Ld. Representative has pointed out that in the Transfer Pricing Study, assessee carried out the comparability analysis by adopting multiple year's data of the comparables. However, the TPO has disagreed with the assessee on this aspect and instead he has carried out the comparability analysis after adopting single year data of the comparables relatable to the period under consideration. At the time of hearing, reliance was also placed on the judgement of the Chandigarh Special Bench of the Tribunal in the case of Quark Systems Pvt. Ltd., reported in 2010-TIOL-31-ITAT-Chd.-SB for the proposition that if some inconsistency in the comparable exists, then it should be removed from the final list of comparables notwithstanding the fact that assessee had initially considered it as a comparable concern. In our view, the plea of the assessee for exclusion of Infosys Technologies Ltd. cannot be shut out merely because the said concern was initially adopted by the assessee as a comparable in its Transfer Pricing Study. However, we may wish to point out that the cause and justification for its exclusion is liable to be demonstrated by the assessee. In the present case, it has been pointed out by the assessee that the said concern is functionally different and that it was a giant company in the area of development of software services and it assumed all the risks leading to higher profits, whereas the assessee was a captive unit servicing only its own affiliates and assumed only a limited risk. Quite clearly, the turnover of Infosys Technologies Ltd. stands at Rs.15,051 crores (approx) whereas assessee's turnover from software development services is to the tune of Rs.73 crores (approx). It is also clear from the Tabulation above, that the said concern is undertaking diversified activities whereas assessee is providing software services, at minimal risk as 100% activities are to its associated enterprise. In-fact, assessee has rightly relied upon the judgement of the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) wherein in a somewhat similar situation the action of the Tribunal in excluding Infosys Technologies Ltd., from the list of final comparables was affirmed. In the case of Agnity India Technologies Pvt. Ltd. (supra), assessee was a wholly owned subsidiary of a USA company, and was engaged in providing software development services for its associated enterprises as a captive service provider. The Tribunal had found on the basis of the differences in risk profile, nature of services, revenue earned, ownership of branded/proprietary products, expenditure on research and development etc., that the concern M/s. Infosys Technologies Ltd. was not comparable with Agnity India Technologies Pvt. Ltd. The Hon'ble High Court of Delhi affirmed the aforesaid finding of the Tribunal. In the present case too, the differences between assessee and Infosys Technologies Ltd. as tabulated above, have not been controverted by the Revenue and therefore in our view assessee has justifiably demonstrated that M/s. Infosys Technologies Ltd. was liable to be excluded from the final set of comparables. We hold accordingly."23 ITA No.2090/PUN/2012
40. In view of the above discussion we are of the considered opinion that Rollatainers Limited has to be excluded from the list of comparables. The Ld. Counsel for the assessee filed a chart showing that if the same is excluded the assessee falls within +/-5%. Even otherwise also the Ld. Counsel for the assessee brought to our notice that the correct PLI for the year ending 30-09-2008 is 10.18% as against 13.32% taken by the Assessing Officer and once the correct PLI is taken the assessee falls within +/-5%. Since we have already held that Rollatainers Limited cannot be considered as comparable because of significant related party transactions and different financial year apart from being a company having negative networth for 3 consecutive years, therefore, ground of appeal No.5 by the assessee is allowed.
41. Ground of appeal No.8 relates to erroneous comparison of entities having different working capital structure with the assessee's operation.
42. The Ld. Counsel for the assessee at the time of hearing submitted that the TPO has allowed the working capital adjustment in A.Y. 2006-07. In A.Y. 2005-06 the Tribunal has set aside the issue to the file of the CIT(A) as it was not adjudicated by him. He accordingly submitted that in the light of the direction of the Tribunal in assessee's own case for A.Y. 2005-06 he has no objection if the matter is set aside to the file of the TPO. The Ld. Departmental Representative has no objection for the same.
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43. After hearing both the sides, we find the Tribunal in assessee's own case in ITA No.512/PN/2012 filed by the assessee and ITA No.557/PN/2012 filed by the revenue vide order dated 28-02-2014 for A.Y. 2005-06 while restoring the issue to the file of the CIT(A) has observed as under :
"16. The only other Grounds remaining for determination is by way of Grounds of Appeal Nos. 9 and 10. In terms of Ground of Appeal No.9, the grievance of the assessee is that the CIT(A) erred in not considering the assessee's plea to allow adjustment to take into consideration the difference in levels of working capital employed by the assessee vis-à-vis the comparable companies. By way of Ground of Appeal No.10, the grievance of the assessee is that the CIT(A) erred in not considering the assessee's plea for allowing adjustment on account of difference in levels of risk assumed by the assessee vis-à-vis comparable companies.
17. On both these aspects, the substantive grievance of the assessee is that the aforesaid specific pleas raised by the assessee, have not been adjudicated by the CIT(A). In this connection, a reference has been invited to the written submissions filed before the CIT(A), a copy of which has been placed in the Paper Book at pages 124 to 170. In particular, our attention was invited to para 2.9.2 of the written submissions wherein assessee had raised the issue of working capital adjustment and also to para 2.9.3 wherein the ITA No.557/PN/2012 A.Y. 2005-06 issue of allowing risk adjustment was raised. The learned counsel for the assessee pointed out that aforesaid two aspects have not been adjudicated by the CIT(A) and that they have a bearing on the determination on the final tax liability. The learned counsel also furnished a copy of the order of the TPO u/s 92CA(3) of the Act for the subsequent assessment year of 2006-07 wherein the plea of the assessee for allowing of adjustment on account of working capital differences has been accepted. It was therefore contended that omission to deal with such Grounds of Appeal by the CIT(A) is unjustified.
18. Factually speaking, the points raised by the learned counsel for the assessee have not been controverted by the learned Departmental Representative appearing for the Revenue.
19. In background of the aforesaid factual matrix, it is evident that the grievance raised by the assessee in terms of the Grounds of Appeal Nos. 9 and 10 have not been adjudicated by the CIT(A) and, therefore we deem it fit and proper to restore the same back to the file of the CIT(A) for adjudication afresh. Needless to say, the CIT(A) shall allow the assessee a reasonable opportunity of being heard and thereafter he shall adjudicate the pleas raised by the assessee on merits in accordance with law. Thus, on Grounds of Appeal Nos. 9 and 10, assessee succeeds for statistical purposes."25 ITA No.2090/PUN/2012
44. In the light of the decision of the Tribunal in assessee's own case for A.Y. 2005-06, we deem it proper to restore the issue to the file of the TPO with a direction to decide the issue of working capital adjustment. Needless to say the Assessing Officer shall give due opportunity of being heard to the assessee and decide the issue as per law. We hold and direct accordingly. Ground of appeal No.8 raised by the assessee is accordingly allowed for statistical purposes.
45. In Ground of appeal No.9 the grievance of the assessee is regarding the erroneous computation of operating margin of the assessee.
46. The Ld. Counsel for the assessee submitted that as per the generally accepted accounting principle, reimbursement which are at actuals without any markup should be netted off and the same cannot be considered to be income. He submitted that the assessee has netted off the freight clearance charges in its financial statements, incurred on behalf of its AEs and subsequently recovered from its AEs. Further the operating margins of both, i.e. the assessee and the comparable companies are computed based on the audited financial statements and the TPO has gone ahead to include expenses recovered by the assessee from its AEs in its operating income for determining the operating margins from EOU operations thereby considering 5.65% as the operating margin as against 6.05% computed by the assessee in its TP study report. Thus, there is certain difference between the assessee and the comparable companies.
26ITA No.2090/PUN/2012
47. Referring to pages 303, 304, 376 and 378 of paper book No.1 the Ld. Counsel for the assessee drew the attention of the Bench to the details of operating income and operating expenses and the recovery of freight clearance charges and approval and other expenses. He submitted that there is no impact since the assessee has taken the net expenditure as cost. Therefore, the TPO is wrong in saying that you should have filed separately the operating income and the operating expenditure including the recoverable from the AEs.
48. The Ld. Departmental Representative on the other hand heavily relied on the order of the Assessing Officer/TPO and DRP on this issue.
49. After hearing both the sides, we find the assessee has recovered certain part of its expenses from its AEs which is attributable to the AEs and thus debited the net amount of the expenditure to the profit and loss account. It is the case of the TPO that the assessee should have separately shown the reimbursement from the AEs and the expenditure incurred and not the net amount. It is the case of the Ld. Counsel for the assessee that there is no impact in the net profit since the assessee has taken the net expenditure as cost.
50. The assessee has filed a chart showing computation of operating margin from EOU operations and domestic operations and the working for impact of operating margin of the assessee company from EOU and DTA operations including recovery of expenses that there is absolutely no impact in the overall profitability. In our 27 ITA No.2090/PUN/2012 opinion, when the assessee has shown the net expenditure after crediting the recoveries from the AE as the part of the expenditure it does not make any difference if the recovery is shown separately in the credit side and the gross expenditure is shown in the debit side. Net result will be the same. We, therefore, find merit in the plea of the Ld. Counsel for the assessee that the TPO has erred in computing the operating margin of the assessee by including expenses recovered from Bobst group entities as the operating income rather than properly netting off the same from the relevant expenses head to which they have been debited. Ground of appeal No.9 raised by the assessee is accordingly allowed.
51. In ground of appeal No.10 the assessee has challenged the order of the TPO/DRP in computing the TP adjustment in relation to the EOU operations of the assessee for A.Y. 2008-09 by computing the same on revised operating income of the assessee rather than the revised operating cost.
52. The Ld. Counsel for the assessee submitted that during A.Y. 2008-09 its major transaction is of export of manufacturing machines to its AEs and therefore it has properly considered PLI as operating profit/operating cost. It is also his submission that TPO in its show cause notice computed the TP adjustment of the assessee on adjusted operating cost. However, at the time of passing the TP order he has erroneously computed the TP adjustment on the adjusted operating revenue instead of revised operating cost. Referring to page 341 of the paper book the Ld. Counsel for the assessee submitted that the TPO in his show cause notice has proposed an adjustment of Rs.1,44,24,000/- by considering 28 ITA No.2090/PUN/2012 Rs.23,68,48,230/- as the operating cost. However, in the final order he changed the figure to total revenue of Rs.24,02,18,415/- without any show cause notice. According to him he should have taken the operating cost and not the operating revenue. The Ld. Counsel for the assessee drew the attention of the Bench to the submissions made before the DRP, copy of which is placed at pages 378 and 379 of the paper book. He accordingly submitted that suitable direction may be given to the TPO for correct computation of the TP adjustment in relation to the EOU operations of the assessee for A.Y. 2008-09.
53. The Ld. Departmental Representative on the other hand heavily relied on the order of the TPO/DRP.
54. After hearing both the sides, we find the TPO in the show cause notice to the assessee had proposed adjustment of Rs.1,44,24,000/- on the basis of the total operating cost of Rs.23,68,48,230/-. However, in the final order he has changed this figure to the total revenue of Rs.25,02,18,415/-. The submission of the Ld. Counsel for the assessee that the TPO's action is not justified because the assessee was not confronted regarding the change in mind of the TPO from operating cost to operating revenue could not be controverted by the Ld. Departmental Representative. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the TPO with a direction to give an opportunity to the assessee for such change from operating cost to operating revenue. The TPO shall decide the issue in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. This 29 ITA No.2090/PUN/2012 ground by the assessee is accordingly allowed for statistical purposes.
55. In ground of appeal No.12 the grievance of the assessee is erroneous comparison of commission from marketing of machines with the commissioner from marketing of spares.
56. Facts of the case, in brief, are that during the year under consideration, the assessee company had received commission income of Rs. 5,59,00, 724/-, from its Associated Enterprise on marketing of its machines in India, forming part of international transaction related to domestic operations. For the purpose of benchmarking the above international transaction related to domestic operations, the Assessee Company followed combined transaction approach using TNMM as most appropriate method to arrive, at arm's Iength price. The TPO did not accept the method adopted by the assessee and benchmarked international transaction pertaining to domestic operations on a transaction by transaction basis and thereby proposed an upward adjustment on commission income received by the assessee on sale of machines of AEs, to arrive at arm's length price.
57. During the year under consideration, the assessee has entered into an agreement with its Associated Enterprises, as per which, the assessee company earns a commission at @ 5% on sale value of the machines sold on behalf of the Associated Enterprises. The assessee also receives commission at @ 15%, on sale value of the spare parts sold on behalf of the Associated Enterprises. The assessee in its submission dated 29.07.2010, made before the TPO had submitted 30 ITA No.2090/PUN/2012 that the company had a sales and service office in India which provided marketing services in relation to Machines and Spares supplied in India directly by Bobst Group Entities, and customer support services in relation to Spares traded in India by the assessee. It was further stated by the assessee that the resources employed inter-alia includes staff, place, assets etc. for trading and marketing activity were common. Thus it was inferred by the TPO that the functional assets employed and the risks assumed by the assessee are same as far as the marketing activities of machines and marketing activity of spares are concerned. The TPO further observed that for selling the machines on behalf of the Associated Enterprises, the function under taken are much more arduous which involves identification of customers, identification of customers' requirement, under taking full sales functions right from the suitability of machines, requirements of the customers, pricing after sales services, customer assurance, etc. Whereas in respect of the activity of marketing of spare parts, supply of warranty spares are only required to be done in respect of the known customers and is a function which is nothing, but a sort of after sales services functions done by the assessee to its AEs. The assessee in its submission made before the TPO stated that the assessee has provided a common Functional Assets and Risk ('FAR') analysis in transfer pricing study report in relation to the transactions pertaining to domestic operations which inter-alia include transactions pertaining to marketing activity carried on by it for FY 2006-07. The TPO observed that the FAR for transactions pertaining to domestic operations is common since the resources employed by the company that Inter- alia includes marketing personnel, place, assets etc for trading and 31 ITA No.2090/PUN/2012 marketing activity were common. In view thereof the TPO held that the rate of commission received by the assessee should ordinarily be higher than the rate of commission it receives in relation to other activities such as, marketing of spare parts and supply of warranty spares mainly because the functions involved in sales and marketing of machines are much more than that of marketing of spares. Further, on being asked, the assessee also failed to furnish the details of the cost incurred by the company in relation to activity pertaining to receipt of commission for sale of machines. But, after considering the fact that the activities have taken place by employing same/common assets and assuming same/similar risks, an estimate of higher rate of commission on the sale of machine more than 15% has not been made by TPO. After considering all the facts and circumstances and data available on record, the TPO proposed to take the rate of commission on sale of machine at 15% instead of 5% adopted by the assessee, for the purposes of benchmarking the international transaction relating to receipt of sales commission on sale of machine, forming part of domestic operations, to arrive at the arm's length price and upward adjustment of Rs.8,85,44,000/- was worked out. The DRP upheld such action of the TPO. The Assessing Officer accordingly made addition of the same.
58. Aggrieved with such order of TPO.DRP, the assessee is in appeal before the Tribunal.
59. After hearing both sides we find identical ground was raised by the assessee in its own case for A.Y. 2007-08 which reads as under :
"5. Erroneous comparison of commission on marketing of machines and commission on marketing of spares.32 ITA No.2090/PUN/2012
Erred in comparing the international transaction pertaining to receipt of commission for marketing of Bobst Group machines with the international transaction pertaining to receipt of commission for marketing of spares, i.e. controlled transactions of the Appellant itself."
60. We find the Tribunal in ITA No.1295/PN/2011 order dated 28- 02-2013 for A.Y. 2007-08 has discussed the issue from Para 7.3 onwards and has observed as under :
"7.3 TPO/AO observed that assessee is receiving commission at the rate of 15% from the AEs for marketing of spares in India while the rate of commission for marketing the machineries of AEs, the stands at @ 5%. In the instant case when the aggregated approach of benchmarking as done by the assessee has not been found to be acceptable and when the stand alone profitability from this international transaction has not been able to be worked out for the reason that the related costs are not identifiable by the assessee and further there cannot be any reliable uncontrolled transaction available in the public domain, it compelled TPO to look into the data and information that is available. Under the circumstances, DRP held that TPO was justified in comparing the international transaction of Bobst India with a controlled transaction of Bobst India itself.
7.4 Before us Ld. AR reiterated the submission raised before TPO/DRP and also raised additional contention to oppose the finding of DRP on issue while on other hand supported the order of TPO which was upheld by DRP. All these rival contentions of both the parties on the issue at hand are being dealt in succeeding sub para.
7.5 The stand of assessee has been that it is inappropriate to use controlled transactions for bench marking. Based on the Indian TP regulations including Rule 10A(a), Rule 10B(1), Rule 10B(2),Rule 10B (3) and Rule 10B(4), following points need consideration:
A. Transactions entered into by tested party should be compared with uncontrolled transactions; and B. Uncontrolled transactions do not include transactions between associated enterprises.
Indian TP regulations prescribe that most appropriate method has to be identified for benchmarking an international transaction and comparison has to be done with uncontrolled transactions and not controlled transactions to arrive at the arm's length price. Accordingly, the approach of benchmarking the transaction pertaining to receipt of commission from marketing of machines by comparing the same with controlled transaction of Appellant itself does not fall under any of the methods prescribed under the provisions of section 92C of the Act. It is contrary to Indian TP regulations and not acceptable under the Indian TP regulations. Similar view has been taken by ITAT in case of Skoda Auto India Pvt. Ltd. Vs. ACIT (122 ITJ 699), M.S.S. India Pvt. Ltd. (123 ITJ 657) and Bechtel India Pvt. Ltd. Vs. DCIT (136 ITJ 212). ITAT in the above 33 ITA No.2090/PUN/2012 mentioned decisions view was taken that for determining the arm's length price and benchmarking international transactions of an assessee, reference should be made only to uncontrolled transactions. Hence, benchmarking the international transaction pertaining to receipt of commission using international transaction of Appellant itself for comparison is not valid as per the Indian transfer pricing regulations. As per Para 2.3 and 2.6 of OECD TP guidelines it is obvious that for application of any TP method for benchmarking international transactions, comparison has to be with uncontrolled transactions. According to us TPO was not justified to not to take this aspect into consideration while dealing issue at hand.
7.7 Next argument on behalf of assessee is that functions involved in marketing of spares are more than functions involved in marketing of machines for sale of machines, the number of transactions and number of negotiations are less as compared to sale of spares where significant efforts are required to be taken on a day to day basis. It is difficult to convince the customers to keep safety stock of spare parts as it involves carrying cost and blockage of funds. The customers have tendency to procure the spares purchased through local suppliers/ fabricators etc as it saves a lot of time as compared to importing these parts and is also cost effective and therefore continuous monitoring / follow-up / liaisoning with the customers is required for sale of spares, according to assessee, the machines of Bobst group are sold in the market by its brand name and quality that it provides. However, in case of spares, customers have an option to purchase spares locally of totally different brand. Further, due to paucity of time the customers prefer taking spares from local suppliers and they also do not prefer to maintain a safety stock even after continuous suggestions by the Appellant regarding the same. According to us TPO / AO have not looked into this practical/particular aspect of assessee's business while dealing issue at hand which is not justified.
7.8 Next argument of assessee is that Bobst Group entities sale spares on credit basis to customers in India whereas machines are sold only when letter of credit is opened by the customers. Accordingly, for earning commission income vide marketing of spares, the Appellant is required to incur additional recovery costs for assisting Bobst Group entities in recovering the payments from customers; this activity is not involved in case of earning commission income from marketing of machines as the payments are received in advance. The parameters demonstrating the fact that functions involved in sale of spares are much more arduous as compared to the functions involved in sale of machines. Accordingly, commission on sale of spares should be higher than the commission on sale of machines. This objective aspect has been ignored by TPO/AO.
Moreover, the quantum of sale of machines and sale of spare parts also been ignored. In view of the above, we found that the functions involved in marketing of spares are much more arduous as compared to functions involved in marketing of machines and accordingly, higher commission on marketing of spares as compared to the commission in marketing of machines is justified.
7.9 Next argument of assessee is that market research studies and technical publications suggest the general industry trend that commission on marketing of spares is higher as compared to commission on marketing of machines. We do not accept this argument of assessee in isolation. This is subjective aspect which has to be appreciated in its facts 34 ITA No.2090/PUN/2012 and circumstances. Without prejudice to above we find that according to TPO/AO has not given cogent reasoning for rejecting TNMM identified by the Appellant as the most appropriate method for benchmarking its international transactions pertaining to domestic operations. The approach adopted by the TPO i.e. using controlled transaction of the Appellant itself (receipt of commission on marketing of spares) for benchmarking the international transaction pertaining to receipt of commission for marketing of machines is not appropriate as per the Indian TP regulations. Accordingly international transaction of the appellant pertaining to receipt of commission for marketing of machines benchmarked by assessee by aggregating the same with other international transactions pertaining to domestic operations using TNMM should not be rejected. We hold so.
61. Since the Tribunal has already decided the issue in favour of the assessee on this issue, therefore, in absence of any contrary material brought before us by the Ld. Departmental Representative, ground raised by the assessee on this issue is allowed.
62. Ground of appeal No.14 relates to short grant of tax deduction at source credit to the extent of Rs.3,63,397/-.
63. The Ld. Counsel for the assessee submitted that he has no objection if the matter is restored to the file of the Assessing Officer with a direction to give correct credit for TDS.
64. After hearing both the sides, and considering the totality of the facts of the case, we restore this ground to the file of the Assessing Officer with a direction to verify the records and give appropriate credit for the TDS. The Assessing Officer shall give due opportunity of being heard to the assessee. We hold and direct accordingly. Ground of appeal No.14 by the assessee is accordingly allowed for statistical purposes.
35ITA No.2090/PUN/2012
65. The Ld. Counsel for the assessee submitted that Grounds of appeal No.15, 16 and 18 are consequential in nature. Accordingly, these grounds being consequential in nature are dismissed.
66. So far as ground of appeal No.17 is concerned, the same relates to levy of interest u/s.234C.
67. It is the submission of the Ld. Counsel for the assessee that interest u/s.234C has to be computed on the basis of the returned income and not on the basis of the assessed income. Since in the instant case the Assessing Officer has computed the interest u/s.234C on the basis of the assessed income he submitted that appropriate direction may be given to the Assessing Officer for reducing the same.
68. After hearing both the sides, we are of the considered opinion that interest u/s.234C has to be charged on the basis of the returned income and not on the assessed income. We therefore direct the Assessing Officer to compute the interest u/s.234C on the basis of the returned income. This ground raised by the assessee is accordingly allowed for statistical purposes.
69. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 03-02-2017.
Sd/- Sd/- (SUSHMA CHOWLA) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER iq.ks Pune; दनांक Dated : 03rd February, 2017 lrh'k 36 ITA No.2090/PUN/2012
आदे श क' ( त*ल+प अ,े+षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आय% ु त(अपील)- The CIT(A)-11, Pune
4. आयकर आय% ु तs / The CIT Central, Pune
5. (वभागीय +त+न,ध, आयकर अपील य अ,धकरण, "ए" iq.ks / DR, ITAT, "A" Pune;
6. गाड0 फाईल / Guard file.
आदे शानस ु ार/ BY ORDER,स या //True Copy// सहायक रिज=>ार/Assistant Registrar आयकर अपील य अ,धकरण ,पण ु े / ITAT, Pune