Income Tax Appellate Tribunal - Kolkata
At & S India Private Limited, Karnataka vs Assessee on 29 January, 2015
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 ,
2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2
AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8
Page 1 of 61
IN THE INCO ME TAX APPELLATE TRIB UNAL,
KOLKATA 'B' BENCH, KOLKATA
Before Shri Mahavir Singh (Judi cial Member)
and Shri Shamim Yahya (Accountant Member)
I.T.A. No. 126 2/K ol./ 201 0
Assessm ent year : 2005 -2 006
Deputy Commis sioner of Income Tax ,. .. ... .. ..... .. .. .. ... .... .. .Ap pellant
Circle-11 , Kolkata,
P-7, Chowringhee Square,
Kolkata-700 06 9
-Vs.-
M/s. A T & S India Pvt . Limited ,, .. .. .. .. .. .. .. .. . ... .. .. .. ..........Re spondent
12A , Industri al Area ,
Nanjangud ,
Mysore,
Karnataka-5 71 30 1
[PA N : AAE CA 29 30 J]
&
I.T.A. No. 186 /Ko l./ 2 011
Assessm ent year : 2005 -2 006
M/s. A T & S India Pvt . Limited ,. .. .. .. .. .. .. .. .. . ... .. .. .. ....... ....Ap pellant
12A , Industri al Area ,
Nanjangud ,
Mysore,
Karnataka-5 71 30 1
[PA N : AAE CA 29 30 J]
-Vs. -
Additional Commi ssioner of Income Tax ,. . ... .. .. .. .. .. .. .. ..Re spondent
Range-11 , Kolkata ,
Aayakar Bhawan ,
P-7, Chowringhee Square,
Kolkata-700 06 9
&
I.T.A. No. 207 1/K ol./ 201 0
Assessm ent year : 2006 -2 007
M/s. A T & S India Pvt . Limited ,. .. .. .. .. .. .. .. .. . ... .. .. .. ....... ....Ap pellant
12A , Industri al Area ,
Nanjangud ,
Mysore,
Karnataka-5 71 30 1
[PA N : AAE CA 29 30 J]
- Vs .-
Deputy Commis sioner of Income Tax ,. .. ... .. ... .. .. .. .. .. ..Re spondent
circle-11, Kolkata ,
Aayakar Bhawan ,
P-7, Chowringhee Square, Kolkata-7 00 06 9
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 ,
2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2
AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8
Page 2 of 61
&
I.T.A. No. 779 /Ko l./ 2 012
Assessm ent year : 2007 -2 008
M/s. A T & S India Pvt . Limited ,. .. .. .. .. .. .. .. .. . ... .. .. .. .......... Appellant
12A , Industri al Area ,
Nanjangud ,Mysore,
Karnataka-5 71 30 1
[PA N : AAE CA 29 30 J]
-Vs. -
Deputy Commis sioner of Income Tax ,. .. ... .. ... .. .. .. .. .. .. ..Re spondent
Circle-11 , Kolkata,
Aayakar Bhawan ,
P-7, Chowringhee Square,
Kolkata-700 06 9
Appearances by:
Shri Soumitra Choudhury, Advocate, for the assessee
Smt. Mad hu Malat i Gh osh, JCIT, for t he Dep a rtment
Date of conc luding the hearing : Dec emb er 16, 2014
Date of pr onouncing the order : J anuar y 29, 2015
O R D E R
Per Mahavir Singh:
These cross app eals by r evenue (ITA No .1262/K/2010) and by assessee (ITA No.186/K/2011) are ari sing out of order of CIT(A) in App eal No. 614/CIT(A)-XII/Circle-11/09-10/Kol dated 30.03.2010. Assessm ent was framed by Addl. CIT, Range-11, Kolkat a u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referr ed to as "the Act") for AY 2005-06 vide his order dated 29.12.2008. ITA No. 779/K/2012 by assessee i s ari sing out of order of Dispute Resolution Pan el, Kolkat a p assed u/s. 144C(5) of the Act vid e F . No.DRP/ Kol/2011-12/270-277 dated 23.09.2011. Assessment w as fram ed by DCIT, Circle-11, Kolkat a (order giving effect to DRP's direction) u/s. 143(3) r.w.s. 144C(13) of the Act vide his order dated 09.11.2011 for AY 2006-07.ITA No. 2071/K/2010 by assessee i s ari sing out of order of Di spute
Resolution Pan el, Kolkat a passed u/s. 144C(5 ) of the Act vide F. No. DRP/Kol/06/2010-11/107-111 dated 28/29.09.2010. Assessm ent was framed by DCIT , Circle-11, Kolkata (order giving effect to DRP's direction) u/s.
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 ,
2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 3 of 61 143(3) r. w. s. 144C(13) of the Act vi de his order d ated 04 .10.2010 for AY 2007-08.
2. At the outset, it is noticed that assessee's app eal in ITA No.186/Kol/2011 is barred by limitat ion by 202 days and a condonat ion petition i s fil ed qua th at. The r easons stated ar e that such delay occurred on account of fir e accid ent took place on assessee's busin ess pr emises o n 13.06.2010. The order of CIT(A) in ap peal no. 614/CIT(A)-XII/Circle-XI/09- 10/Kol for the AY 2005-06 was served on assessee on 14.05.2010 and the l ast date for filing of app eal before Tribun al ag ainst this order was 13 .07.2010. As ther e was a fir e accident on 13.06.2 010, the paper s relating to assessment for the above st ated assessm ent year 20 05-06 and orders in appeal p assed by CIT(A) agai nst th e assessment order go t dislocat ed during such fire. In this fire, computers, UPS and other assets w ere d estroyed or dam aged and r ecords were di slocated . The assessee r eceived a lett er from the AO with regard to the demand rai sed for this AY 2005-06 and 2006-07 along with an order u/s. 226(3) of the Act dated 30.12.2010, attaching sever al ban k accounts, it came to the knowledge of the assessee that appeal ag ain st assessm ent order for AY 2005-06 has not been filed becau se papers relating to that assessment year and order of CIT(A) has been mixed wi th the other records and lost sight of by the executi ves dealing with the tax m atter s. When it cam e to the knowledge of the assessee ther eafter took step s for preparing the grounds of appeal and filed app eal before Tribun al on 31.01.2011 with a delay of 202 days. In view of the above, now Ld . Counsel for the assessee before us request ed for condonation of del ay for the reason that there is reason able cause in view of the above reason s. L d. CIT, DR, on the other hand , has not seriously object ed to the condonation. In view of the above reason s, we ar e of the view th at th ere i s a r easonabl e cause due to fir e occurred in the busin ess premi ses of the assessee and due to that assessee's paper rel ating to CIT(A)'s order wer e lost sight off. Ther e is a reason abl e cau se and hence, w e condone the del ay and admit the appeal.
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 4 of 61
3. The first common issu e in these cro ss appeals (in ITA No.1262/Kol/2010 of revenue's app eal and IT A No. 186/Kol/2011 of assessee's app eal)is as reg ards to the order of CIT(A) r estricting disallowance at Rs.2 ,26,84,459/- out of the total di sallowance of payment for preliminary w arranty and reworking co sts of Rs.2 ,55,17,674/- made by AO by invoking the provisions of section 40(a)(i) of the Act for the reason of non- deduction of TDS u/s. 195 of the Act. According to AO, these p aymen ts are in the nature of fees for technical ser vi ces. For deletion of Rs.28,33 ,215/-, revenu e has rai sed the following two grounds:-
1. On the facts in the circumstances of the case, ld. CIT( Appeals) has erred in de leting the disallowance of Rs.28, 33, 215/-, being the warran ty claimed/payments in the nature of technical se rvices as defined under secti on 9( 1)(vii) of the I.T. Act hence liable for deduction of tax at sou rce under secti on 40(a)(ia) which has been violated.
2. On the facts and in the circumstances of the case, ld. CIT(A) has erred in deleting the disallowance on the basi s of fresh evidences produced thereby vi olating the provision of Rule 46A of I.T. Rule s, 1962.
Again st confirmation of disallowance of warranty and reworking cost s of Rs.2 ,26,84,459/- assessee has raised fol lowing ground no. 3(a), (b) and (c):
"3. (a) That the ld. CIT(A) erred in confirming the order of the AO disallowing the sum of Rs.22, 684,459/- being reimbursement of reworking c ost paid by the appellant to M/s. AT & S Austria, by applying the provi sions of section 40(a)(i) of the Act.
(b) That the ld. CIT(A) erred in confirming the orde r of the AO holdin g the aforesaid paymen t to be in the natu re of fees for technical services under secti on 9( 1)(vii) of the Act.
(c) That the ld. CIT(A) erred in confirmi ng the order of the AO h oldin g that tax was require d to be deducted at source f rom the aforesaid paymen t by applying the provisi ons of se ction 40(a)(i) of the Ac t."
4. Brief fact s relating to the above common issue are that the assessee is an Indian Company being subsidiar y to its par ent company AT&S Austri a i s engaged in the m anufacture and sale of professional grade print ed circuit boards. The AO noticed from audited accounts that th e assessee has paid a I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 5 of 61 sum of Rs.2,55,17,674/ being paym ent for preliminar y warrant y and reworking cost s, which ar e in the n atur e of p aym ents for t echnical services as defined in section 9(1)(viii) of the Act. According to him, as the assessee failed to deduct ed tax at source, thi s su m is to be di sallowed by invoking th e provision of section 40(a)(i ) of the Act . He di sallowed the same. Aggrieved, assessee pr eferred appeal before CIT(A), who bifurcated this sum into warranty cost separ ately and reworking cost separ atel y. He held that warranty co sts to the ext ent of Rs. 28,33,215/ is in th e nature of reimbursement payment s and balance sum of Rs.2,26,84,459/ is in the nature of technical servi ces being reworking costs. Accordingly, he h eld that the warranty co sts are not liable to TDS bu t reworking costs bei ng in the natur e of technical ser vices are liable to TDS. The obser vation s of CIT(A) r ead s as under:-
"5. 3.4 I have consi dered the appellan ts submissi ons as we ll as obse rvations of the AO.
My obse rvations are a unde r:
(i) From the above facts and circumstance s of the case it is clear that the above mentione d payments made by the appellant to i ts paren t company AT& S Austria are on ly in term s of the distribu tion agreemen t. As pe r the term s of the agreement the paten t compan y paid the amoun t of warranty to the custome rs and reworking c ost (repair c ost) to the se rvice provide rs an d thereaf ter raised debit n ote on the appellant in re spect of both these costs. This is pure ly inte rnal arrangemen t of the group and it is established principle that a person cann ot escape its le gal tax liability through its intern al arrangemen t. Since, the warranty claim directly paid to the custome rs in conside ration of their clai m regarding defective goods there is no income com ponen t in the han ds of customers. Howeve r, in respec t of reworking cost the true recipient of income are ou tside service provides wh o are doing the repair job. Therefore, the appe llant is liable to deduct tax at sou rce under section 195 of the Inc Tax Act, 1961at the time of entry in the books of accounts should be made in respect of debit n otes rai sed by the AT & S Austri a regarding reworking c ost incurred by it on behalf of appe llant.
(ii) Therefore, unde r the f acts and circ umstances of the case the discussion and judicial decisions inclu ding the decision s of the ape x court regarding ple a of the appellant that the e xpense s are on ly reimbursemen t as given in connection to ground no.2( a), (b) and I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 6 of 61
(c) above are squarely applicable to thi s ground also in relation to reworking cost and the refore , the appe llant is liable to de duct tax at source unde r secti on 195 of the Inc T ax Act, 1961 from payment towards reworking c ost.
(iii) Regarding ple a of the appellan t th at th e re working costs are n ot in the nature of fees for technical service it may be noted th at the appe llant is engaged in the business of manufacture an d sale of professional grade printed circuit board and in my opinion repair jobs of such sophisticated goods sh all always be in the nature of technical services. In this re gard referen ce is made to the c ase laws viz., Sahara Airlines Ltd. Vs. De puty CIT (2002) 83 ITD 11, 41 (Del) wherein it was held th at the conside rati on for repair job am ounted to f or technical service as defined in sec tion 9(1)(vii) of the Act. In the case of Mannesmann Demag Lauchhammer Vs. CIT (1988) 26 ID 198, 202-03 (Hyd), it was held fees for services rende red to re pair of machinery already installe d amounts to technical fees.
(iv) Therefore based on the above fac ts an d the cited case laws, in my opinion, there is no force in the submission of the appellant that the paymen ts of re working jobs are not in the nature of fees for technical se rvices as per the me aning of the said term assigned under the provisions of section 9 of the Income Tax, 1961 and therefore , these payments are not charge able to tax in Indi a even in the hands of ultim ate ven dor/service providers.
(v) Further, whether the am ounts paid by the appellant are f or th e purposes of making or earning any income from any sou rce outside India an d, hence, covere d wi thin the exc epting c arve d ou t in sec tion 9(1)(vii)(b) of the Act. Sub-clause (b) of clause (vii) of section 9 carves out an exception to the taxability of fees for technical services paid by a resident. Acc ording to the 'excepti on', the fees for technical services payable in respect of any se rvices utili zed; (a) for the purpose of business or profession carried out by such person outside Indi a or; (b) for the purpose of making or earning any income from any source outside India is not an income that falls within the net of section 9. The appe llant is re lying on the second part of the exce ption, i.e., 'for t he purposes of making or earning an y income from any source outside Indi a'. It is the case of the appellant that its bu siness principally c omprises of export revenue in the sense that it sold its products to its paren t com pany in Austria pursu ant to a distribu tion agreemen t an d in tu rn the paren t company sold these goods to customers in Europe . Hence, the source of income in hands of the appe llan t com pany is n ot me re selling of the goods to the distribu tor, but the actual sale of the goods by the distributor and alth ough its business is carried out from Indi a, yet the income it get is from a sou rce outside India and I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 7 of 61 the payments made towards reworking cost is for the purpose of earning income from a sou rce outside In dia. Hence, according to the appe llant, the benefit of e xcepti on envisaged by sec tion 9( 1)(vii)(b) will be available to it.
It was difficult to acce pt the appellan t's contention. The income which the applican t e arns by export ac tivities cannot be said to be from a sou rce ou tside In dia. The 'sou rce' of such income is very much within India and the entire busine ss activities an d operations trigge ring the exports take place wi thin India. The source, which generates income, must necessari ly, be traced in India. Having regarde d to the fact that the entire ope rations are carried on by the appe llant in India and the income is earned from such ope rations taking place in India, it would be futile to con tend that the source of earning income is outside India, i.e., in the country of the custome r. Sou rce is referable to the staring point or the origin or the spot where som ething springs into existence. The fac t th at the custome r an d the paye r is a non- reside nt and the end produc t is made avai lable to that f oreign custom er does not me an th at the income is earne d from a sou rce ou tside India.
(vi) The appellant has also submitte d that the price of the product sold to AT & S Austria are fixed at fair m arket value com pared wi th other distribu tors or customers of the appellant taking into account sales volume, com peti tion an d local marke t condi tions e tc., Therefore, the goods e xported by the appellant to the AT & S Austria are not at c ost price but at c ost plus profit. Therefore, it could not be said that the source of income is outside India. An other hurdle that come s in the way of the appellant is that it cann ot be said that the transfe r has taken place outside India. The prope rty could have ve ry well passé in India. It may also be n ote d that the appe llant has also claime d de duction under section 80HHC in respec t of such export ou t of India up to the assessmen t years deduction was avai lable under the provi sions of the Act. Therefore, this ple a of the appe llant is n ot acceptable.
(vii) As regards the con tention of the appe llant that there is n o e lemen t of income embedded in the payments made by the appe llant company to parent com pany in additi on to obse rvations given above my obse rvations at para 4.3 holds good.
5.3. 5 Decision Therefore, base d on the above discussi on and the cited c ase laws the disallowances made by the AO of Rs. 2, 26, 84,459/- on accoun t of reworking cost u/s 40(a)(i) due to n on deduction of Tax at source under section 195 of the Inc Tax Act, 961 is confirmed and of I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 8 of 61 Rs.28, 33,215/- on account of warran ty claim is dele ted. The appe llant's ground is partly allowed. "
5. First, w e will deal with the issu e of revenue's app eal qu a the first and second ground again st the order of CIT(A) in deleting th e disallowance of th e warranty p ayments/costs on the groun d that the same w as in the n ature of technical services as defin ed und er section 9(1)(vii ) of the Act and h ence liable for deduction of TDS under section 195 and on account of th e said non- deduction of tax under th e provision s o f sub- section 40(a)(ia). Ld . DR argued that in the course of assessm ent, it w as noticed that the assessee had p aid an amount of Rs.2,55,17,674/- for preliminary warran ty cost s and re-working costs and the sam e was li abl e for dedu ction under section 195 of the Act but the assessee h ad not deduct ed TDS, th e provision s of section 40(a)(i a) h ad been invoked and the di sallowance mad e. He st at ed that the assessee i s in the busin ess of m anufacture and sale of pri nted circuit boards from its factory in Nanjangud and is a su bsidi ary of AT & S Austria. The assessee supplies it s manufacturing Print ed Circuit Boards t o the parent company and the p arent company had paid cert ain warr anties for the defective products. The p arent company had also mad e repair s to some of the products supplied by th e assessee for sale to foreign parti es. He stat ed that the assessee had paid to AT & S Austri a on account of the warr anty and the re-working cost s, which was liable for TDS under section 195of the Act but CIT(A) deleted th e addition representing the amount of Rs.28,33,215/- out of the total disallowance of Rs.2,55,17,674/- by h olding that the reimbursem ent of the costs of warrant y to AT & S Austria was not liable for TDS. Hence, he argued that the order of the CIT(A) was liable to be reversed. Ld. CIT-DR could not point out the nature of the fr esh evid en ce fil ed before CIT(A) by the assessee in resp ect of the second ground raised by th e Revenue th at the deletion by CIT(A) was on th e basis of fr esh evidence produced in the course of th e appeal proceeding s.
6. In reply, Ld. Counsel for the assessee made argument that in order to reach the customer s in Europe, the assessee had ent ered into a Distri bution I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 9 of 61 Agreement with AT & S Austria whereby the assessee h as grant ed exclusive rights to AT & S Austri a to market, di stribute and sell products in European countries. Under th e afor esaid agr eem ent, the goods m anufactured by the assessee wer e sold to AT & S Au stria which in turn sold the goods to final customers. The pri ce for the produ cts w as fixed at fair m arket value compared with other distributors or customers of AT & S Austri a taking into account various par amet ers. As per t he aforesaid agreemen t, the warrant costs to the cu stomers for the goods sold were lying with the assessee. Accordingly, AT & S Austri a was enti tled to deduct a preliminary w arranty amount of 2% of the gross in voice price that AT & S Austri a charged from it s customers from the payment s due to t he assessee on account of the goods sold by the assessee to AT & S Austria. The above warr anty amount was retain ed by AT & S Austria for the pur pose of settlemen t of warranty cl aims in regard to customer complaints. At the end of the year, AT & S Austri a would determine the co st s actually incurred by it for meeti ng the w arranty expendi ture. Any amount in excess of 2% gu arant ee ret ained by AT & S Austria would be paid by the assessee t o AT & S Austria. Hence, any excess of actual costs in curred by AT & S Au stria over the ret ained 2 % was required to be borne by the assessee and payable to AT & S Austria. The actu al costs incurred would include journey and lodging exp enses, re-work/chemical and other material cost s. He argued that the Assessing Officer di sallowed the warranty exp en ses reim bursed on the g round that essentially in the n ature of technical fees. He explain ed that the payments to AT & S Austri a were not on account of any services rend ered by AT & S Austria but was only the reimbursement of warr anty obligation which the assessee as a seller of th e products is bound to discharge. Sin ce t he assessee is r espon sible for paying the warrant y claim s of the customer s for defects in the goods sold, for the sake of convenien ce AT & S Au stria i s incurring such costs on behalf of the assessee and is claiming r eimbursemen ts of th e same from the assessee. The payment s mad e on cost to cost basi s for the services render ed and did not involve any profit elem ent. On this, Ld. Counsel for the assessee placed reliance on the deci sion of Hon'bl e Supreme Court in the case of CIT v Tejaji I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 10 of 61 Farasram Kh araw alla Limited (1967) 67 ITR 95 (SC) to support his contention that the r eimbursement of the actual exp enses would not be taxable in the h ands of th e p erson r eceiving the reimbur sem ents. It w as th e further contented th at a p erusal of the provisions of section 195 of the Act clearly shows that TDS was liable to be made from the payments mad e to a non-resident in the event such paym ent is charg eable to tax under the provisions of the Act and the said r eimbursement s did not in any way represent an amount chargeabl e under the provisions of th e Act in the h ands of AT & S Austri a and consequ ently n o TDS was li abl e to be m ade. It w as stat ed that the issue w as squar ely co vered by the d eci sion of the Hon'ble Coordinate Bench of this tri bunal in assessee's own case for the assessm ent year 2004-05, wherein the Tribunal had set aside the i ssue to the file of the Assessing Officer as no agr eem ent for payment of w arranty was mad e availabl e before the Tribunal. Ld. Counsel drew our attention to the copy of the order of the Tribunal at page 47 of assessee's paper book and st ated that consequenti al order h ad been p assed fo r the assessment year 2004-05 by th e Assessing Officer wher ein he has allowed the warrant y cost s incurred by th e assessee by holding that the paymen ts of warranty costs repr esent only reimbursement of actu al cost and ther e was no n eed to d educt TDS before making paym ent to AT & S Austria. He drew our attention to page 49 of the paper book, which was th e copy of the assessm ent order for the assessm ent year 2004-05 and stat ed th e fact th at while passing the consequ ential assessment order for th e AY 2004-05, the AO had taken cognizance of the order of the CIT(A) for the AY 2005-06 being th e impugned order of CIT (A) and had held that the fact relating to th e AY 2005-06 was identical to that of AY 2004-05 and as such there w as no need to devi ate from the deci sion given by CIT(A) for the AY 2005-06. Hence, it was urged that consequ ently order of CIT(A) w as liable to be upheld on thi s i ssue.
7. We have consid ered th e rival submissi ons. A peru sal of the d eci sion of the Hon'bl e Supreme Court in the case o f Tejaji F arasram Khar awalla Limit ed, supra cl early shows that Hon'ble Supr eme Court has categorically held th at I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 11 of 61 the reimbur sem ent of th e actual exp en ses would not be t axable in th e hand s of the person recei ving the reimbursem ents. Further Hon'bel Karn ataka High Court in a recent judgment in the case of DIT v. Sun Microsystems India P. Ltd. (2014) 369 ITR 63 (Karn) exactly on the similar issue interpr eting article 7 of the DTAA betw een Indi a and Singapore, which is identically worded to article 7 of DTAA betw een India and Austri a, and held as under:-
"The material on rec ord disc loses that the assessee ente red into an agreemen t for availing of logistic se rvice for Sun Microsystems Singapore P. Ltd. ("Sun Singapore" for brevity). In terms of the agreement, Sun Singapore is required to provide distribution, managemen t and logistic services to Sun Microsystems Indi a P. Ltd. ("Sun Indi a" for brevi ty) and such services include d providing spare managemen t se rvices provision of buffer stock, defective re pair se rvices, managing local re pai r centres, business planning to addre ss se rvice le vels, e tc., Sun Singapore is n ot having any place of business or perm ane nt establishment in India. Entire services were rendere d by Sun Singapore from outside Indi a. Sun Singapore is not engage d in the business of providing logistic se rvices in India. Sun India the assessee avails of se rvices of Sun Singapore for which a service fee is paid. From the business description of the assessee, it is clear that the assessee is engaged in marke ting an d su pport system of hardware and sof tware products. The m ateri al on rec ord do not disclose that Sun Singapore has made avai lable to the asse ssee its technical knowle dge, experience or skill. Unde r these circumstances, the T ribunal held that, as Sun Singapore is n ot having any perm anent e stablishment and that Sun Singapore has not made available the technical knowle dge, expe rience or skill, the payments made by the assessee to Sun Singapore were not requi red to be taxe d under the head "Business" an d is not taxable in view of artic le 7 of the DTAA between In dia and Singapore. The Revenue is challenging the said finding on the ground that the te rms of the agreement provide s from m aking available inven tory physical movement an d self-con trol proce ss, assistance to enable inventory tran saction s and man agement and busi ness planning to addre ss service level relating to the local bu siness an d custome r needs. Howeve r, the assessee is not utilising the said se rvice s in order to avoid deduc tion tax at source.
This court had an occasion to consider this agreement in the case of CIT v. De Beers India Mi ner als P. Ltd . Reported in[2012] 346 ITR 467 (Karn), where, afte r refe rring to various provisions of law, it was held that the question, whether alon g with rendering technical services, whether the technical knowle dge with which the services was rende red was also m ade available to the assessee/custome rs is purely a que stion of fact which is to be gathere d from the te rms of the contract, the nature of services undertaken and what has transmitte d in the end after rendering technical services. If along wi th technical services ren dered, if the service I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 12 of 61 provider also makes available the technology which they used in rendering services, then it falls wi thin the definition of "fees for technical ser vices" as con tained in the DTAA. Howeve r, if technology is not made available along with technical services what is rendere d is only technical se rvices an d the technical kn owledge is withheld, then such a technical service would not fall with in the definition of "t echnical servi ces" in the DT AA and the same is not liable to tax.
From the facts of this case, it is c lear that Sun Singapore has not made available to the asse ssee the technology or the technological se rvices which is required to provide the distribution, manage ment and logistic services. That is a finding of fact recorde d by the Tribunal on appreciati on of the entire material on record. When once factually it is held the technical services has not been made available , then in view of the law declared in the aforesaid judgme nt, there is n o li ability to de duct tax at source and, the refore , the fin ding rec orde d by the appellate authority cann ot be foun d fau lt with. In that view of the matte r, the substantial question of law is answere d in favour of the assessee an d against the Revenue."
From the above Judgem ent of Hon'ble Karn ataka High Court it i s clear that the par ent company h as not mad e avail able to the assessee th e t echnology or the technological services which was required to provide th e di stribution, managem ent and logistic servi ces. In view of this judgment and p erusal of the order of the AO giving effect to t he order of Coordinat e Bench of this Tribunal for the AY 2004-05 in ITA No. 1450/Kol/2008 dated 31.03.2010 clearly shows that the Assessing O fficer after verifying the agreement with AT & S Au stria has also taken into con sider ation the decision of CIT(A) for the AY 2005-06 and has held that the said warranty expen ses are nothing but reimbursement of the actu al cost and co nsequently there i s no requirem ent of deduction of TDS under section 195 of the Act. We have gone through the orders of the coordinate B ench of thi s Tribunal in the assessee's own case in ITA Nos.1448 & 1449/Kol/2008 dated 24.07.2009 for AYs2002-03 and 2003- 04 and ITA No. 1450/Kol/2008 dated 31.03.2010 for the AY 2004-05, wherein it has been h eld as under:-
"2. 1. The facts of the case are that the assessee is a company which is deriving income f rom manufac ture an d sale of professi onal grade printed circuit boards. Du ring the ac counting year relevant to assessment year unde r c onsideration , the assessee m ade the paymen t of Rs.45,94,291/- to M/s. AT & S, Austria Technology & I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 13 of 61 System technik, Aktienge sellschaft (hereinafter c alled ' AT & S, Austria"). The above paymen t was made by the assessee with out deduction of tax at source. Before the AO, it was e xplained by the assessee that the amoun t has been pai d at cost of inter-com pany services receive d. The assesese has ente red into an agreemen t dated
13. 03.2001 with M/s. AT & S, Au stria. In the agreement, it is stated that M/s. AT & S, Austri a has en tere d into different agreements with different provide rs of services. A part f rom these se rvices rende red by the service provide rs re lates to business operation of the assessee an d are u tilize d by the assessee. M/s. AT & S, Austri a makes the payment on behalf of the assessee to the service providers for th ose se rvices which are rende red by the service providers for the business operation of the asse ssee. The assessee then reimburse s M/s. AT & S, Austria f or the paymen t made by it on behalf of the asse ssee to the se rvice providers. The AO was of the view that the services provided are in the nature of fees for technical se rvices u/s. 9(1)(vii) of th e I.T. Act, 1961. He also rejecte d the assessee' s contention that it is reimbursement of the expendi ture to M/s. AT & S, Au stri a. He state d that M/s. AT & S, Austria is merely the conduit for m aking the payment of technical services rende red by the serviced providers. Since the asseessee did not deduct the T DS, the AO disallowed the en tire payment of Rs.45, 94,291/- u/s. 40(a)(i) of the Act. On appe al, the CIT(A) sustained the orde r of the AO on this issue. Hence, this appeal filed by the assessee.
2.2. At the time of hearing before us, the le arned counse l for the assessee argued at length. His arguments were of two folds, vi z.-
(i) That the payment m ade by the assessee to M/s. AT & S, Austria was only reimbu rsement. He pointe d ou t that M/s. AT & S, Au stri a has entere d into different agreemen ts with different providers of service. Since part of the se rvices we re utilized by the asse ssee, M/s.
AT & S, Austria has recove red such part f rom the asse ssee. He pointed ou t that the alloc ation of the actual e xpenditure incurred has been made on a rational basis, i.e. on the basis of number of PCs used by the assessee and other grou p concerns, the details of which were duly furnished before the lower au thorities and the CIT(A) has also re produced the same on page 6 of his orde r. He submitted that there is no liability of TDS for reimburse ment of the expenditure. In support of this conten tion, he re lied u pon the following decisions: -
309 ITR 356 (AAR) - Cholaman dalam Ms General Insu rance Co. Ltd.
142 ITR 493 (Cal.) - CIT -vs.- Dunlop Rubber Co. Ltd.
(ii) That the services received by the assessee were in the natu re of user of the copy righ t products. The licence to use copy right products doe s not am ount to rende ring of technical se rvices within the meaning of secti on 9( 1)(vii) of the Act. Theref ore, mere ly I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 14 of 61 because M/s. AT & S. Austria had permi tted the assessee to u se the copy right products, i.e. software of various services providers, it does not am ount to rende ring of any tec hnical services by M/s. AT & S. Austria to the assessee within the me aning of section 9(1)(vii) of the Act. Thus no income h as acc rued in India and, accordingly, there is no liability to deduct the tax at source. In support of this contention, he has re lied u pon the following decisions:-
251 ITR 53 (Mad/.)- Skyce ll Communications Ltd. -vs.- DCIT;
95 ITD 269 (De l-SB)- Motorola Inc. -vs.- DCIT, Non- resident Circle;
94 ITD 91 (B ang.) - Samsung Electronics Co. Ltd. -vs.- ITO (TDS).
2.3. The ld. De partmental Re presen tative, on the other h and, relied upon the orders of the authorities be low. He submitte d that the assessee has u tilize d the services being provided by variou s se rvice provider com panies. The assessee made the payments for such services uti lized by it. Therefore, in eff ect, the paymen t was made by the assessee to various se rvice providing companies through M/s. AT & S. Austri a. M/s. AT & S. Austria was only a conduit through which payment was m ade. Th e services utilize d by the assessee were highly technical and the re fore, the same we re within the meaning of technical se rvices as provided u /s. 9(1)(vii) of the Act. He , therefore, submitte d that the assessee was li able to de duct tax at sou rce from the payments m ade by it. Since the assessee had failed to deduct tax at sou rce, sec. 40(a) (i) of the Act was attracted.
The same should be sustained. The ld. DR also stated that the facts of vari ous cases relied u pon by the ld. Counsel for the assessee are altoge ther differen t.
2.4. In the rejoinder, it is stated by the ld. Counsel that the various service provide rs had an agreement with M/s. AT & S. Austria and not with the assessee-com pany. Theref ore, the conten tion of the revenue that the paymen t is made by the assessee to the se rvice providers th rough the conduit of M /s. AT & S. Austria is actu ally incorrect. As per the agreemen t with th e various serviced provide r companies, it was M/s. AT & S. Austria acquired the licence to use those se rvices. In tu rn, M/s. AT & S. Austria pe rmitte d its grou p concern worldwide to use those se rvices and the total paymen t made to service provide rs was recove red f rom the se rvice use r companies on the basis of services actu ally utilize d by them. Thus, in the proce ss, no income has accrued to M/s. AT & S. Au stria. It has only recovered the actual e xpenditure incurred from all grou p concerns.
2.5. We have carefu lly c onside red the argum ents of both the sides and peru sed the material placed before us. M/s. AT & S. Austria had entered into agreemen ts with seve ral companies for utili zing their I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 15 of 61 products. In turn, it permitted its grou p concerns to utili ze those products and the total payments m ade to the service provide rs were allocate d to the grou p companies who actually utilize d the services, the de tails of which has given in page 6 of the CIT(A)'s orde r, read as under: -
Sr. N o. Part icul ars o f ser vic e C ode Keys Total cos t Share of A T & SInv India oice/ FY inc urred 2001-0 2 agreem e by HQ nt recei ved
3 Servi ces prov ided by . Micros oft Irel and Operat ions L td. , see lice nses for A T& S A lice nce for IN4 2 180,43 1 36,754 Yes Micros oft prod uc t.
C harges w ill be based on num ber o f PC s used pe r lega l e nt it y.
Micros oft en terpr ise IN5 2 0 0 No
Lizenze n
Micros oft Med ien
4 Servi ces prov ided by
SA P Oster reic h G MbH,
see co ntra ct w i th
A T& S, A ustr ia
A . SA P
Main tena nce ,
charges w ill be
passed o n the
num ber of SA P
users p er legal
ent it y.
W artung m y SA P.c om IN6 3 181,79 4 22,388 Yes
5 Servi ces prov ided by
. IBM Ost errei ch G m BH
In terna ti onal
Burom aschi ne n
G esselschaf t
A . SA P
m ainte nanc e.
C harges w ill be
passed o n the
num ber of SA P
users p er legal
ent it y
m ySA P.com IN7 3 20,315 2,502 No
Lizenzve rtrag
SA P R / 3 Lizenzgeb uhr IN8 3 84,417 10,396 No
SA P R / 3 Einf uh uru ng IN9 3 108,69 3 13,386 No
B. Licenc es for
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 ,
2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2
AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8
Page 16 of 61
firew all
softw are and
hardw are.
C osts w ill be
evenl y spared
am ong the
tota l num ber
of pla nts l in
the A T& S
group
Projec t F irew all C is co IN11 4 3,589 449 No
PIX
W artung F irew all 4 0
C isco P IX
7 Not m en ti oned
ND C haron F axserve r- IN11 2 7,885 1,606
Kauf
TOTA L 87,481
2.6. From the above , it is evident that the allocation of expenditure for utilizing Microsoft products was on the basis of number of PCs used by the service receive r companies. Similarly, se rvices provide d by SAP , Au stria were alloc ated on the basis of number of SAP use rs. In view of the above, we are of the opinion that the am ount paid by M/s. AT & S. Austria for using the products of various service provider c ompanies was allocated am ongst the group c ompanies including the asse ssee on the basis of services actu ally uti lized by them. Therefore, the natu re of paymen t by the assessee to M/s. AT & S. Austria was in the nature of reimbu rsement of the expenditure actually incurred by M/s. AT & S. Austria.
2.7. That the Hon'ble ju risdiction al High Court has con sidere d the similar issue in the case of Dun lop Rubber Co. Ltd. (su pra) and held as unde r:-
"that the Tribunal was right in arriving at the view that the paymen t was for the recoupment of th e expenses incurred for the technical data for which a rese arch de partment was maintained by the assessee-com pany in London. The result of the rese arch was f or the benefit of all c oncerned inclu ding the head office and the subsidiary conce rns. It was for the sh aring of the expenses of the rese arch which was u tilize d by the subsidiaries as well as the head office organizati on th at the paymen ts were made by the Indian com pany an d received by the assessee-com pany. The f act th at afte r th e termination what was to happen to the inform ation gathere d was not menti oned, indicated that it could not be anythi ng but sharing of the expense s. But the fact that the tech nical data was jointly obtained and the expenses we re share d toge ther indicated that I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 17 of 61 it could not be tre ate d as income. The fact that only 0. 67 pe r cent of the turnove r was allowed as rese arch contribu tion to the assessee-com pany, was becau se of the restrictions imposed by the Gove rnment. The refore, the am ounts received by the assessee-com pany did not constitute income asse ssable to tax".
The above decision of Hon'ble Ju risdictional High Cou rt was also relied upon by the Authority for Advance Rulings in the case of Cholam andalam Ms General insurance Co. Ltd. (supra), wherein their Lordships held as unde r:-
"That the am ount pai d by the applicant could n ot be said to be in the natu re of conside ration f or offeri ng the se rvices of I. The parties had en tere d into a mutu ally be neficial agreemen t, an d incidental there to, the applican t reimbu rsed a part of the salary of the employee payable by HM FICL. W hat the applicant paid went to reimburse ment of the cost borne by HM FICL on accoun t of employmen t I, that too, partly. In this process no income could be said to have been gene rate d which answere d the description of "fees for technical services".
2.8. In view of the above decisions of Hon' ble Jurisdicti onal High Court as well as Authority for Advance Rulings, we hold that in the process of reimbursemen t of e xpenditu re, no income can be said to have generate d re quiring de duction of tax at sou rce. Since the re was no liability of deduction of tax at source , section 40( a)(i) of the Act cannot be invoked. Acc ordingly, ground no. 2 of the assessee's appeal is allowed".
As the facts ar e similar for the AY 2005-06 considering the fact that for the AY 2004-05 the AO has accept ed the claim of the assessee that the reimbursement of the warrant y exp enses i s not liable for TDS u/s 195 of the Act and as the Revenue h as not been able to dislodge this finding, th e finding of CIT(A) deleting the disallowance made on account of non-deduction of TDS in resp ect of w arranty exp en ses stand s confirmed . This i ssu e of revenu e's appeal is di smissed.
8. The common issue in this appeal of assessee rai sed by way of above reproduced grounds 3(a) to 3(c), i s ag ainst the p arti al confirmation of the disallowance made by th e Assessing Officer in resp ect of the r eimbursement of the reworking costs. Main cont enti on of Ld. Counsel for the assessee in I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 18 of 61 resp ect of the balan ce amount of Rs.2,26,84,456/- the said amount was on account of reworking co sts p aid by the assessee to AT & S Austri a, which the Assessing Officer had held, w as liabl e for TDS under section 195 of the Act and on account of non-deduction of the TDS the provi sions of section 40(a)(i a) had been in voked in respect of this payment . It was explain ed by Ld. Counsel that the assessee i s in ter alia engag ed in th e manu factur e and sal e of Printed Circuit Boards. During the previous year relevant to the assessment year under consider ation, t he assessee ent ered in to an agreemen t with AT & S Austria whereby the assessee granted exclusive rights to AT & S Austria to market di stribut e and sell products in European countries. Under the aforesaid agr eem ent, th e goods manufactured by th e assessee wer e sold to AT & S Austria which in turn sold the goods to final customers. During the course of the m anufacture of the product, the assessee could not complet e th e full manufacturing of the goods. Certai n parts of the m anufacturing process which were critical for completion of manufacture and saleability of th e product could not be done by the assessee. Accordingly the un finish ed products were exported to AT & S Aust ria. Sin ce i t was essenti al to complet e the manufacture of fini shed goods without which the customers would not accept the product AT & S Austria completed the manufacture of the product in Austria by using it s manufacturing facilities and for the same it was mutually agreed by th e assessee and AT & S Au stria that the actu al cost incurred by AT & S Austri a in performing the aforesaid manufacturing activit y to fini sh the production of PCBs would be reim bursed by AT & S India. It was also agreed that these costs would inter alia include direct material s cost, mat erial overhead costs, production overhead cost s, transportat ion cost s, etc. in curred in Austria by AT & S Au stria. Further, it was also agreed th at the assessee would bear all the ri sks associated with the product defects or non-conformities that exi sted at the time of delivery of products by the assessee to AT & S Aust ria which in turn, aft er rework, would be sold to final customer s. By virtue o f the afor esaid agreement, the actual cost incurred by AT & S Austri a in g etti ng the products r epair ed in Europe in order to get the product sold was rei mbursed from the assessee during the I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 19 of 61 relevant previou s year. In fact, th e cu stomers to whom the products were sold in Europe made complaint about t he defects in th e product sold and in order to make the product vi able for sale as agr eed , the customer them sel ves incurred cost on their own to remove the defects and got the sam e reimbursed from AT & S Austria and consequently got the cost reimbursed on actual basi s from the assessee.
9. Ld. Counsel stat ed that during the r elevant previous year, AT & S Austria rai sed debit notes on the assessee toward s the said manufacturing costs incurred by it and the repairing cost reimbursed to the customers in Europe in order to get the products repair ed befor e sal e in Europe, amounting to RS. 2,26,84,459/-. The detailed break-up of the debit notes issu ed by AT & S Au stria for reimbur sem ent of actual cost i s enclosed at pages 63 to 122 of the paper book. The said cost was d ebit ed in the books of accounts of the assessee under the head "Sub-contracting charges" during the previous year relevan t to the AY u nder consid eration . It was further explain ed by Ld. Counsel that while making th e su bject p ayment of Rs. 2,26,84,459/- to AT & S Austria in respect of th e reimbur sem ent of actu al manufacturing and r epair cost , th e assessee did not deduct any t ax und er sect ion 195 of the Act as paym ents con stituted reimbursement of actual cost s incurred by AT & S Austri a. He st at ed that the AO disallowed the said payment under sect ion 40(a)(i a) of the Act by rejecting the contention of the assessee th at reim bursement of actual manufacturing/repairing co st would not constitute income in the hand s of AT & S Austria. The Assessing Officer alleged that the aforesaid p ayment was essentially in th e nature of payment s for fees for t echnical servi ces as defined in section 9(1)(vii) of the Act and as such, these payment s wer e liable for deduction of tax at source.
10. Ld. Counsel stat ed facts that the CIT(A) confirm ed the disallowance made by th e AO on the grounds th at p ayment for r ework cost made to AT & S Austria were in n ature of technical fees within th e meaning of provision s of sect ion 9(1)(vii) of the Act ; and since th e entire operat ions, i.e. manufacturing as well as rep airing oper ations are carried out by th e assessee I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 20 of 61 in Indi a, th e in come earn ed from such operation s by w ay of exports of the said product s would be t axabl e in India and would not fall within the exception as st ated in section 9(1)(vii)(b) of the Act. For the same he argued that as th e assessee had only r eimbur sed th e co sts of the r eworking, th ere was no income element in the paymen t to AT & S Austri a and con sequently the provisions of deduction of tax would not apply. As per him, the provisions of section 195 of the Act what is required is that the payment to the non- resid ent must be an amount charg eable under th e provision s of th e Act an d the income, if any, of AT & S . Au stria w as not liabl e to t ax in Indi a under the Indian Income Tax Act , 1961 as AT & S Au stria did not h ave any common est abli shment or any other presence in any mann er whatsoever in Indi a. He stat ed that though CIT(A) and AO w as of th e view th at in vi ew of the Explanation to section 195, the p ayment by th e assessee to AT & S. Au stria was liable for deduction of TDS as AT & S. Au stria had no common est abli shment or r esid ence or place of bu siness or bu sin ess conn ection in India nor an y other presen ce in any manner what soever and th e provision s of DTAA appli ed, the income of AT & S . Au stria w as liabl e to tax only in Austria. He explai ned th at as p er the provi sion s of section 9(1)(vii ) of the Act , it i s only the income by w ay of fees for technical services which is d eem ed to accrue or arisen in Indi a but the work done by AT & S Austri a fell within the Explanation to section 9 (1)(vii ) in so far as ther e w as no man ageri al technical or consult ancy services provi ded by AT & S Austri a but what was being done under th e re-working was mere in th e natur e of assembly. According to him, even as per the provi sions of section 9(1)(i) and clau se (a) of Explanat ion 1 thereto no p art of the income earned by AT & S Austri a was attribut able to the op erations carried o n by the assessee in Indi a in so far as the manufacturing operation s and the repairing operation s are carried out by AT & S Au stria by usi ng their manufact uring faciliti es locat ed in Austri a and there was no operation of th e same att ributabl e to any op eration carried on in India by AT & S Au stria. Hen ce, as per the DTAA agreem ent ent ered into betw een India and Austria as p er Arti cle 5 read with Article 7 as AT & S Austria did not have any perman ent establishment in Indi a, the in come I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 21 of 61 earn ed by AT & S Au stria w as li abl e to tax only in Au stria and not in Indi a. Moreover, th e natur e of th e activiti es performed by AT & S Au stria on the products sold by th e assessee in Europe was i n the following manner. The sal e of the products in Europe consi st ed of two part s, the first part i s th e goods manufactured by the assessee in India and send to AT & S Austri a and the second part is re-woke done by AT & S. Austri a in Austri a without which the customers would not accept th e pr oduct. He stat ed th at without the said re-working the products would not be sal eable in Europe and re-working is done by AT & S Au stria which i s th e Company situat ed outsid e Indi a with manufacturing faciliti es situat ed only outside Indi a and the ultimate sales to the final cu stomers w ere al so outside India. According to him, when the activiti es of AT & S Austria involved i n the sale of products are carried out outside Indi a from manufacturing the partly finish ed goods in th e manufacturing facility situat ed outsi de India to sell the goods to final customers outside India, th e exclusi onary clau se to section 9(1 )(vii)(b) would come into play and as such the in come earn ed by AT & S Au stria from a source situat ed outsid e India would not be liable to t ax in India under th e Indian Income T ax Act, 1961. Consequ ently the p aymen t by the assessee to AT & S Austri a was outside th e scope of sect ion 9(1)(vii) and it could not be consider ed as in come deemed to h ave accrued in Indi a and consequently th e provisions of section 195 could not be invoked in respect of the p aym ents made to AT & S Au stria. Accordingly it was urg ed that the di sallowance m ad e by the AO and confirmed by CIT(A) was liable to be delet ed.
11. In reply, SR D.R. stat ed that in view of the amendment to Section 195 by the introduction of Explanation (2) thereto, any p ayments mad e by an Indi an Company to a non-resident wheth er they have a resid ence or place of busin ess or busin ess connection or any other p erson s in an y m anner whatsoever mad e no differen ce and th e assessee was liable to deduct TDS. She argued that r e-working cost s are in the natur e of fees for t echnical servi ces as the assessee it self i s engag ed in the busin ess of manufactur e and I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 22 of 61 sal e of profession al goods of Print ed Circuit Boards and the repair jo bs of such sophisti cat ed goods could only be i n the nature of t echnical services.
12. We have consid ered the rival submissi ons and gone through facts and circumstances of the case. Admittedly the assessee i s dealing it s bu siness with its subsidi ary company AT & S Austria. Undi sputedly th e assessee's transaction with the par ent compan y AT & S Austria i s also su bject matt er of Arm's Length Pricing under section 92C of the Act. Consequently it cannot be held that th e assessee h as common establishment of the par ent company AT & S Austri a. Thi s i s because th e assessee has sold goods to AT & S Austri a. A perusal of the provi sions of section 19 5 of the Act alongwith Explan ation (2) thereto as explained by the Ld. SR D.R. would give an indi cation th at all types of payments m ade to a non-residen t by an Indi an Compan y would be liabl e for TDS under sect ion 195of the Act. It w ould mean even th at if an assessee in India m akes any purchases from a forei gn entit y or a non-residen t entity an d the assessee in Indi a makes the p aym ent for such purchases even th at would be hit by section 195 of th e Act. Thi s is becau se of the E xplanation (2) to sect ion 195 of th e Act. However, thi s is not the true interpr etation . The Explanation only explain s the provision. The main provision of section 195(1 ) of the Act uses these specific words " any other sum chargeabl e under the provisions of thi s Act". Ther efore, for the invocation of the provi sions of sect ion 195(1) of the Act , the m ain con dition is that the p aym ent must be of the sum chargeabl e under the provision s of the Indi an Income T ax Act , 1961. Admittedly there i s a DTAA betw een India and Austri a. As per the Articl e 5 read with Article 7 of the DTAA, it is categorical in so far as i f the assessee i n the contracting St ate do es not have a PE in the other Stat e, then the incom e of the assessee in the contr acting St ate i s liable to tax only in th at contr acting State and not in th e other St ate. Furth er, similarly, Hon'ble Karnat aka High Court in a recent judgment in the case of DIT v. Sun Microsystems India P. Ltd. (2014) 369 ITR 63 (Karn) exactly on the similar issue interpr eting article 7 of the DTAA betw een Indi a and Singapore, which is identically worded to article 7 of DTAA between India and Au stria held that th e p arent company has not I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 23 of 61 made available to the assessee the technology or the technological services which was required to provide th e di stribution, man agement and logistic servi ces. Admitt edly AT & S Au stria does not have a PE in Indi a. The DT AA is enter ed into India under section 90 of the Act. Once the DTAA is availabl e under section 90 of the Act, then th e same overrid es the Indian Income Tax Act. Con sequently the provi sions of DT AA would override the Indian Income Tax Act . The fact s in the presen t case clearly show that AT & S Austri a is carrying out the re-working of the p roducts of the assessee at it s own manufacturing plant at Austri a and t here is no connection betw een th e manufacturing acti viti es done by AT & S Austria with the manufacturing process done by the assessee at its manufacturing facility in Nanjangud. Consequently the income, if any, gen er ated by AT & S Au stria on account of the repairing op eration s or manufacturing operations done by AT & S Austri a at its m anufacturing facility outside India cannot be held to gen erat e any income taxable in Indi a under the Indi an In come Tax Act, 1961. Admittedly even as per the provision s of section 9(1)(vii) of the Act and the Explan ation (2) thereto clearly excludes the consid eration for the assembly undert aken by AT & S Austria from the rigours of section 9(1)(vii) of the Act . In these circumstances, as the income of AT & S Austria i s not chargeable to tax under the Indian In come Tax Act , 1961, the requirement of deduction of tax at source under section 195 of the Act would not be applicable and consequen tly no disallowance under section 40(a)(ia) of the Act can be mad e. In the r esult, the addition as mad e by AO and as confirmed by CIT(A), to the ext ent of Rs.2 ,26,84,459/-, st ands d elet ed. Thi s issue of assessee's appeal is allowed.
13. The next i ssue in thi s app eal of assessee is agai nst th e order of CIT (A) confirming the action of AO in disallowing the payments made toward s reimbursement of Information Technology costs being exp enses on connectivit y and softw are charg es. For this the assessee raised following ground:-
"(2)(a) that the ld. CIT( A) erred in confirming the order of the Assessing Officer disallowing Rs.1, 50,44, 031/-, being payments made I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 24 of 61 to M/s. AT & S Austri a towards r ei mbursemen t of Information Technology costs being exp enses on connecti vity charges and softwar e, without appr eciating app ellan ts cont ention.
(b) that the ld. CIT(A) erred in confirming the orde r of the Asse ssing officer disallowing the af oresaid sum of Rs.15, 044, 031 paid to M/s.
AT & S Austria, by applying the provi sions of section 40(a)(i) of the Act .
(c) That the ld. CIT(A) has not appreciated the fac t th at the impugned amoun t is not income charge able to tax in the hands of M/s. AT & S Au stria or respective vend ors and consequ ently no tax was r equired to be deduct ed at source t here from.
(d) That the CIT(A) erred in not following Jurisdictional Tribunal Orde r in the case of appellan t for the AY 2002- 03, 2003-04 and 2004- 05, on the same ground. "
14. Brief fact s relating to the above issue are that the AO during the course of assessm ent proceedings noticed that the assessee has made payment of Rs.1 ,50,44,031/- on account of renting of technical services for information technology costs. According to him, as the assessee failed to deduct TDS u/s 194 of the Act, h e disallowed this sum by in voking of the provi sions of S ec. 40(a)(i a) of th e Act by observing as und er:-
"The contenti on of the assessee has be en considere d and it is not acceptable since the payment will be i n the natu re of rende ring of technical se rvices an d as such, the payment consti tute fee s for technical services as pe r Explan ation 2 of clause (vii) of sub-section 9 of the Act and Article 12(4) of the DTAA between India and Austria. Hence, the said payments would be su bject to withholding tax at source u /s 195 of the Act. As per section 195(1) of the Act, any person responsible for paying to a non-re siden t, any sum charge able under the provisi ons of this Act shall deduct in come tax thereon at the rates in force. It is im portant to n ote that the above men tioned section requires "any sum" ( and n ot any income) charge able to tax unde r the Income Tax Act, to be subjected to de duction of tax at sou rce. The assessee's claim that the payments made were only in the nature of reimbursemen ts and con tained n o e leme nt of income, and hence not subject to wi thholding of tax u /s 195 is found un tenable in vie w of the decision of the Hon'ble Supre me Court in the case of Transmission Corporation of AP Ltd. V CIT where the Apex Cou rt held that the sum he re conn otes gross sum and not me rely the su m that re pre sents income of the payee . The assessee-c ompany, in the instant case has n ot m ade any tax deduction at source on the paymen ts made to AT&S Austria. Henc e, in view of the failure to I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 25 of 61 deduct the tax at source the am ount of R s.1, 50, 44,031/- is disallowe d u/s. 40(a)(ia) of the I.T. Act, 1961 and the same is added back to the total income of the asse ssee company."
Aggrieved , assessee preferred appeal before CIT(A).
15. The CIT(A) al so confirmed th e action of the AO by gi ving the following three reasons:-
i) "He re the se rvice provide r highly tec hnical/skilled services in the nature of inform ation technology,, ele ctronic data processing for WAN satellite link be tween Austria and Nanjan gud and software license and up gradation to the parent company in Austria and also to the subsidiary com panies including the appellan t company. It i s not that the parent com pany h as received the above said services an d in turn just passe d on the same to the subsidiary com panies. All the grou p conce rns including the parent company and the appe llan t company simultane ously received the services from the se rvice providers. It is only when the payment come s an inte rnal arrangemen t among grou p companies has arrived at an d the paren t company being at the helm of the affairs controlling/supe rvising all the grou p concerns including the appe llant company has taken up the responsibility to make the payments not only on its behalf but also on behalf of subsidiary com panies inclu ding the appellan t com pany.
This is mere an arrangement and the facts remains that the appellant company receive d the services along with the grou p conce rns and remitte d the paymen ts through its pare nt company. As said e arlie r this has been done for the sake of con venience and with a view to exempt itse lf for m aking TDS on such payments. By this kind of arrangemen t one cannot escape from the mandatory provision s of the Act. As such I am of the opinion that this is not an ac t of reimbursemen t bu t a de liberate arran gement to e scape from the clutches of TDS provisi ons."
ii) "It is c lear from the above th at th ough all such paymen ts being 'royalty' in nature attract T DS provision s but such payments made in the curse of e xport bu siness of c omputer software or unde r an y approved scheme are exem pt from TDS provision s as the same are n ot chargeable to tax in India.
Therefore, in my opinion any payment f or c ompu ter software [ other than those mentione d in the Second proviso to Section 9(vi)] shall be treated as royalty.
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 26 of 61 Furthe r, in my opinion the right to u se of / access of sof tware and for up gradation of software is in the nature of 'Royalty' paid to a non- resident which is always taxable and more so u /s. 9(1)(vi) of the Act. ...
Therefore based on the above legal provisions and the cited case laws, sin my opinion, there is no force in the submission of th e appe llant that the paymen ts of rent le ase towards elec tronic data processing for W AN sate llite link be twee n Austria and Nanjangud are not in the nature of fees for technical services and cost of software license and up gradation are not in the nature of royalty as pe r the meaning of the said te rm assigne d unde r the provisions of secti on 9 of the Inc Tax Act, 1961 and the f acts of the decision s as cited by the appe llant are not identical to the facts of the instant case therefore, these paymen ts are not charge able to tax in India even in the hands of ultimate vendor/service provide rs namely, Austri an Telecom, Lotu s Inc. Microsof t Corporation etc., "
iii) As regards the contenti on of the appellant that there is no element of income embe dded in the payments made by the appe llan t company to paren t company in addition to observation s given in para
(i) when the whole of section 195 an d Chapter XVII-B are read, then the real picture would emerge. The provision of secti on 195( 1) clearly shows th at any person respon sible for m aking paymen t to non-residen t in respect of any inte rest or any other sum chargeable under the provisions of this Act has to deduct tax at the rates in force. Now what is the me aning of any other sum charge able unde r the provisions of this Act. Obvi ously, it would mean th at portion of the sum on which tax is payable by such non-residen t. But h ow much, that portion is actu ally there? This needs investigation an d the re may be situations that 100 pe r cent of such sum is charge able to tax and there may be situations where practically the whole of such sum is not chargeable to tax. This wou ld depend on the facts and circumstances of e ach case. Now, whenever an assessee making paymen t to a n on-re sident finds that only a particular portion i s chargeable, then obvi ously he has been given a right in terms of sub-
section (2) which the assessee has calle d a beneficial section. As pe r sub-section (2), of sec tion 195 whenever a pe rson responsible for paying any sum charge able conside rs th at whole of such sum would not be income charge able in the case of recipient, he may9 m ake an applicati on to the AO to de termine the appropriate portion of such sum so chargeable and u pon such determination, tax sh all be deducted unde r sub-secti on (1) only on that proportion of sum which is so charge able, which means, the pe rson responsible for making paymen t, e tc., cann ot himself decide what is the appropriate proporti on which is chargeable to tax. T he expre ssion "by g ener al or speci al order" and the "appropriate pr oportion" in this sub[section I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 27 of 61 are key words to unde rstand the meanin g in the sense that there may be situation s where only one particular portion of such sum is taxable in case of similar asse ssees an d the income-tax au thori ties may m ake a gene ral orde r that in su ch type of assessee s that a particular proportion of the sum h as to be con sidere d as incom e chargeable to tax and tax can be de ducted accordingly. The Hon'ble Ape x Cou rt Tran smission Corporation of AP Ltd. And Another vs CIT 239 ITR 587 (SC); cle arly observed that the provision of section 195(1) is for "t entati ve d eduction" which means, the initial assumption shou ld be that the tax has to be deducted on the whole of the am ount because same is subject to regular assessment and it was specifically poin ted out that the rights of the parties were not in an y manner adversely affected, bec ause wh erever the assessee had any doubt that tax is to be deducted on th e lowe r proportion, the such assessee had the opti on to m ake an appli cation under section 195(2). Even the recipient of such payment can make an application to the AO that he may be allowed to receive the payment without any deduction of tax. "
Aggrieved , assessee came in app eal befo re Tribunal.
16. Before us Ld . Counsel for the assessee stat ed in r esp ect of r eimbursed to AT & S Austri a that th e actu al cost of an amount of Rs.1,50,44,031/- was under the head "Information Technology Costs" . He n arrat ed facts that the assessee had ent ered into an agreement dated 13.03.2001 with AT & S Austria. AT & S Au stria, in order to provide services to various group companies carrying out their bu siness, in turn ent ered into differen t agreem ents with differ ent ser vice provi ders for acquiring licences of various products and payment of lease rent for connectivi ty ch arges. AT & S Au stria made payment s on beh alf of the group companies to the service providers and ther eafter cl aimed r eimbursement s of the p ayment s m ade on cost to co st basis for the servi ces r endered by S ervice providers, from group companies including the assessee. He st ated that while making the subject paym ent of RS.1,50,44,031/- to AT & S Austri a in resp ect of the reimbur semen t of actu al cost, the assessee did not deduct an y tax under section 195 of the Act , as payment s for reimbursement of actual costs incurred by AT & S Austria w as not chargeabl e to tax. He st ated that the allocation of actual cost which was reimbursed by the assessee to AT & S Austria w as made on the basi s number I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 28 of 61 of PC's/lap top used, number of SAP user and time used in using the leased lines for connectivit y charges but AO disallowed the aforesaid p ayment by rejecting th e cont ention of the assessee that reimbur semen t of actu al cost would not constitute income in the h ands of AT & S Au stria and further alleged th at AT & S Austria was mer ely a conduit pipe for maki ng the p ayment way of internal arr angements which could not escape tax liabilit y under sect ion 195 of the Act. And CIT(A) also confirmed the act ion of the AO. He stat ed that in the assessee's own case for the assessmen t years, 2002-03, 2003-04 and 2004-05, Coordinate Bench of this Tribunal had accepted the contention of the assessee that the rei mbursemen t of the actual cost is not liable to tax. He drew our attention to pages 129 to 144 of the paper book, which were the copi es of the order s of the Coordinate B ench of this Tribunal in the assessee's own case in ITA Nos. 1448 & 1449/Kol/2008 dated 24.07.2009 for the assessment year s 2002-03 and 2003-04 and ITA No. 1450/Kol/2008 dated 31.03.2010 for the assessment year 2004-05. (These orders have alr eady been relied upon in the appeal of revenue above in ITA NO. 1262/Kol/2010.) Hence it was urged that the disallowance as confirmed by CIT(A) be del eted.
17. In reply, SR DR veh emently supported the order of the AO and CIT(A). She st at ed that the agr eemen t was a m ere arrang ement and the fact rem ains that the assessee had r eceived services alongwith the group concern s and remitted the p aym ent s through its par ent company. This h ad been done for the sake of conveni ence and with a vi ew to exempt itself from making TDS on such paym ent. For this kind of arran gement one cannot escape from the mandatory provision s of the Act and CIT(A) h ad consider ed the n ature of reimbursement of the payment s of rent/lease toward s electronic data processing for WAN Satellite link between AT & S Austria and Nan jangud and the same was not in the n ature of fees for technical servi ces and th e cost of softwar e licence upgradation are not in the nature of royalty as p er the meaning of the said terms assign ed un der the provision s of section 9(1)(vi) of the Act . Hence, i t was urged that order of CIT(A) be sust ained .
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 29 of 61
18. We have consid ered the rival submissi ons and gone through facts and circumstances of the case. A p erusal of the d eci sion of the Coordinate Bench of this Tri bunal r eferred to supra for the assessment year s 2002-03 an d 2003-04 clearly shows that the Tribunal has t aken into consideration the agreem ent dated 13.03.2001 betw een the assessee and AT & S Austria. Further, similarly, Hon'ble Karnat aka High Court in a recent judgment in the case of DIT v. Sun Microsyste ms Indi a P. Ltd. (2014) 369 ITR 63 (Karn) exactl y on the similar issue int erpreting arti cle 7 of the DTAA between Indi a and Singapore, which is id entically worded to article 7 of DTAA between Indi a and Austria held th at the p aren t company has not m ade available to the assessee the technology or the technol ogical services which was required to provide the distri bution, manag emen t and logistic services. We further noticed that i n the said order the Tribunal has taken into consider ation the decision of the Hon'ble Juri sdictional High Court in the case of CIT v Dunlop Rubber Co. Limit ed (1983) 142 ITR 493 (Cal) and in the similar circumstances th at of the assessee to hold that the reim bursem ent of th e expendi ture does not generat e any income in the hands of the recipient and consequently there was no requir ement of deduction of T DS and consequently the provisions of section 40(a)(ia) co uld not be invoked. The fact s being identical for this assessment year, respect fully following the deci sion of Coordinate Bench of thi s Tri bunal i n the assessee's own case for th e assessment years 2002-03 and 2003-04 referred to supra, finding of CIT(A) stand s r eversed and the disallowance as made by the Assessing Officer in resp ect of the reimbur sement of the p ayments mad e to AT & S Austri a to th e ext ent of Rs.1 ,50,44,031/- stand s d elet ed. This issue of assessee's app eal i s allowed.
19. The first common issue in ITA No. 2071/Kol/2010 & ITA No. 779/Kol/2012(assessee's appeals) for AY 2006-07 & 2007-08 is again st the assessment s fr amed by AO u/s. 143(3) read with section 144C(13) of the Act dated 04.10.2010 & 09.11.2011 for the AY 2006-07 and 2007-08 respectively and al so the direction s given by DRP u/s. 144C(5 ) of the Act dat ed I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 30 of 61 28.09.2010 & 23.09.2011 making an adjustment tow ards Arm's Length Price of Rs.20,14,14 ,448/- and Rs.22,80 ,03,914/-. For this, assessee has rai sed following 6 grounds in AY 2006-07:
"1. Th at the order o f the learned Deputy Commissioner of Income Tax, Circle-11 , Kolk ata (Assessing Officer or Lea rned AO) wh ich is in c onform ity wit h the direct ions o f th e Dispute Res olution Panel, Kolk ata (DRP), to t he extent prejudic ial t o t he ap pel lant, is bad in law and l iab le to be quashe d.
2. That t he ld. DRP erred in not a ppreciating t he fact t hat the appe llant had prepared t he TP documentation bo na fide and in g ood fa ith in compliance with th e Act and Income Ta x Rules, 196 2 and selected t he comparable uncontrolled compan ies based on the d etailed functiona l asset and risk analysis performed with due d il ige nce, fol lo wing a meth od ical and consistent benchmarking process in respect of various internationa l transactions wit h assoc iated enterprises.
3. That the l d. DRP erred both in facts and la w in making an adjustment to the transfer price of the ap pell ant by Rs.201, 41 4,4 48/- h old ing that the international transact ions do not satis fy the arm's length princ ipl e envisaged under th e Act and in d oing so gro ssly erred in:
(3.1)Introduc ing add itional quantitat ive fil ter of net fixed asset/sales ratio wit h thresh old lim it o f sim ilar rat io of the assessee, stating th at it woul d lead t o the exclusion of less capita l intensive comp anies and thereby the le arned DRP distorted the co mparabil ity ana lysis and incorrectly included onl y pro fitab le entre preneurial comp anies as uncontrolled comparab les, wh ile exclud ing comparable lo w margin companies from its c omparab il ity analysis.
(3.2 .) That th e learned DRP erred in not appreciating the fact that there are significant d ifferences in the l evels of working ca pit al employed by th e compara bles v is-a-vis t hat o f the app ell ant and suitable adjustment for differences in wo rking capita l needs to be provided.
(3.3 .) Th at the learned DRP erred in appreciating the fact that cash operating marg in earned by appell ant from AT&S Group sales is hig her than the cash o perating margins earned from third p arty sales. There fore, even fr om an internal comparability p erspective , the profitab il ity from th e transactions wit h AT&S group comp ares favourab ly wit h sa les made to th ird parties, establ ishing t he transactions at arm's length .
4. That the ld. DRP erred in disregarding the alternative economic analysis carr ied out b y the assessee consid ering the overseas entity as the tested party an thereb y justify ing th at international transactions undertaken by such overseas entity are at arm's length price. The learned DRP erred in not appreciating the fact th a t associated enterprise i.e . AT&S Austria functions as a distributor earning arm's length returns and AT&S Austria functions as a distributor earning arm's length returns and AT&S I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 31 of 61 India is charact erised as a full fledged l icensed manufacturer wh ich assumes significant business risks assoc iated with carrying out its manufacturing activ ity.
5. The learned DRP erred in not appreciating t he fact that the ap pel lant had incurred operat ing losses in net level o nly for FY 2 005- 06 as compared to pro fit in prev ious and subsequent years. Such losses were due to v arious business reasons including rise in raw materials prices and also due to it being th e first ye ar o f exp ansion. Also, the l earned DRP erred in ignoring t he business and commercial rea lit ies o f t he a p pellant.
6. That the learned DRP erred in conclud ing that t he amended pro viso to section 92C(2) o f the Act under Finance (No.2) Act, 200 9 would be appl icab le to assessment year 2006-0 7 and in not ap preciat ing th at even if the arm's length price fa lls outside the 5 % tolerance band the adjustment would h ave to be reckoned a fter all owing the benefit of + /-5% v ariat ion as provided in prov iso t o section 9 2C(2) o f the Act, while determ ining th e arm's length pr ice."
For AY 2007-08, on the above i ssue of t ransfer pricing ad justment, assessee has raised following ground nos. 3 to 7:
"3. Th at the learned AO and t he le arned Panel erred in not a ppreciating t he alternative ec onomic ana lysis consider in g the overseas entity (A T&S Austria) as the tested party to justify th at the international transactions o f the appe llant are at arm's length having regard to the contracting agreements between the part ies.
4. Th at the le arned AO and the learned Panel erred in not apprec iat ing the business model o f t he a ppe llant in respect of its sales to uncontrol led and customers, wherein the international transaction is lim ited to the margin retained by the associated enterpr ise for t he d istribution functions performed.
5. That t he learned AO and the learned Dispute Resolution Panel erred in uphold ing the adjustment to the arm's length price made by the learned Transfer Pricing O fficer amounting t o INR 21, 69, 02, 41 7 in respect of the export transaction and INR 13 0,2 8,0 2,0 00 in respect of the imp ort transactions of the appe llant and in d oing s o erred in:
(a) Upho lding o perating pro fit /sales margin as the appropriate profit leve l ind icator as aga inst cash pro fit marg in adopted b y the appel lant in determinat ion o f arm's lengt h price;
(b) Disregarding the fact that t he learned Pan el had acce pted the cash pro fit marg in as an appro priat e PLI in the proc eedings for FY 200 5-06 in v iew of the app ell ant being a ca pita l intensive unit.
6.That the l earned AO and the learned Panel erred in not provid ing appropr iate economic adjustments wh ile de termining the arm's length pr ice.
7.The l earned AO and the learned Panel er red in not prov ing t he bene fit o f lower r ange o f + /-5% in d etermination o f ar m's length price ."
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 32 of 61
20. As the Tran sfer Pricing issue in both these appeals are ident ical, thi s issu e i s being decid ed by this common order taking the facts, circum stan ces and issue from AY 2006-07.
21. Brief facts leading to the above issue are that th e assessee filed it s return of income on 23.11.2006 for the relevant AY 2006-07 a draft assessment order w as passed on 24.1 2.2009 u/s. 143(3) read with section 144C(1) of the Act making following additions:
"i) Adju stment of Arm's Length P rice as per TPO' s orde r date d
30. 10.2009 Rs. 15, 92,64, 423,
ii) Disallowance u /s. 14A read with Rule 8D Rs. 6810/-. "
Again st this draft assessment order assessee filed objection in Form No. 35A before the Disput e Resolution Pan el (DRP), Kolkata. DRP vid e it s order d ated 28.09.2010 directed the AO u/s.144C(5) of the Act to make an ad justment towards Arm's Length Price at Rs.20 ,14,14,448/- as ag ain st the adju stmen t determined by TPO at Rs. 15,92,64,42 3/-. Aggrieved, assessee is in appeal before Tribunal. The Assessi ng Officer referred the computation of the Arm's Length Price in relation to the internat ional transactions ent ered into by the assessee, which is Associat ed Enterprise for the relevant previous year to the Transfer Pricing Officer. The assessee had filed it s tr ansfer pricing study for the relevant previous year with the Transfer Pricing Officer . The assessee had adopted the TNMM method representin g the transactional net margin method as th e most reli abl e measure of arm's length result for the m anufacturing segmen t. Und er the TNMM method, the term specified in tran sactional net margin, the assessee had adopt ed the cash profit margin on sales as the profit level indicator for the TNMM an alysi s. T he assessee had complet ed the search process in Prowess and capit al line plus data-bases in adopting the filter s for the search. One of th e most filter s of search criterion Companies with a ratio of net fixed asset s to sales great er than 500% was r eject ed. Con sequently th e following comparable compani es were found from the search:-
(i) Akasaka El ectronics Limited;
(ii) An and Electronics & Indu stries Limi ted;
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 33 of 61
(iii) Fin e-Line Cir cuits Limit ed.
The arithmeti c mean of the cash profit margin on sales of the aforemention ed four comparables found as a result of the search for the comparabl e companies was 15 %. The assessee's cash profit margin for the r elevant previous year applying the method analogy as that appli ed in respect of comparables came to 10%. Consequ en tly as the cost profit margin of the assessee was within the toler ance band of plus minus 5% as prescri bed under the proviso to sub- section (2) of secti on 92C of the Act was called for. The Transfer Pri cing Officer alleged th at cash profit margin method did not indicate the true profit earned by the assessee as the assessee had not t aken into consider ation th e co st in curred by the assessee in purch asing an d installing pl ant and machinery and oth er fixed assets. Ld . Counsel explain ed that consequen tly the Tran sfer Pricing Officer rejected the assessee's contention to t ake th e cash profit m argin on sales as the appropriat e profi t level indicator and select ed the operat ing profit margin as the appropriate profit level indi cator for the assessee and the Tran sfer Pricing Officer computed the operating profit margin of the assessee at (-) 1.57308107% and the arithmetical mean of th e operati ng profit margins of th e comparabl e companies sel ected by the assessee at 7.80836917%. Consequently the Transfer Pricing O fficer computed t he tran sfer prici ng adju stment at Rs.15,92 ,64,423/-. Again st the said p roposed draft assessment order, th e assessee had approached th e DRP, Kolkata. Before the DRP, it was st at ed that the methodology adopted by the Transfer Pricing Offi cer being the net fixed assets to sales ratio was not the correct method in so far as th e ratio did not indicate as to wheth er the compan y was the capit al int ensi ve or otherwi se. It was th e su bmission that by adopting t he net fixed asset s to sales r atio, th e comparables reduced from the four mentioned above to three in so far the Fine Lin e Circuit s Limit ed got excl uded from the li st of comparable companies in so far as the NF A to sal es in respect of the Fine Lin e Circuit s Limited was also ver y low. It was the submission that th e Disput e Resolution Pan el vide an order dat ed 28.09.2010 accept ed the assessee-company's claim for adoption of the cash profit margin on sales as the appropriate profit level I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 34 of 61 indicator. How ever , the DRP dir ected for the exclu sion of the Fin e Line Circuits Limit ed from the li st of compar able compani es on th e ground that the five year's averag e NFA to sales rati o of Fine Line Circuits Limit ed was significantly lower th an that of the assessee as al so on the ground that Fin e Line Circuit s Limit ed did not cl ear the text of the fixed asset s r atio an alysi s as the r atio of asset s employed to the t otal turnover was significantly lower as compared to that of the assessee. Consequently the DRP computed the Arithmetic Mean of the cash profit margin on sales of the remaining three comparable compani es at 17.7433% based on the dat a for the financial year 2005-06 for the assessmen t year 2007-08 relevan t to the fin anci al year 2006-
07. The Transfer Pricing Officer again applied the n et fi xed asset s to sales ratio to exclude the Fine Line Circuits L imited and consid ered only two of the comparables being BCC Fuba Indi a Limi ted and Pr eci sion Electronics Limit ed as comparable companies and consequ ently by applying the operating profit margin arrived at 13 .22%.
22. In resp ect of the assessee's objection s before the DRP, th e DRP reject ed the objections fil ed by th e assessee by raising eight allegation s. The sai d allegation s ar e as follows:-
"The DRP, in the orde r issued under se ction 144C( 5) of the Act, rejecte d the objections file d by the assessee-com pany on the following allege d grounds:-
First alle gation: The appellant com pany did not carry out separate arm's len gth price analysis for each of the international tran saction s but bench marke d 10 inte rnati onal transactions as afore said on aggre gate basis using cash profit margin on sale s as the PLI.
Second alle gation: The DRP allege d th at the appellan t com pany had selecte d the comparable companies as pe r its own con venience, ignoring consistency an d without any apparent reason for not selecting Akasak a Electronics Ltd. an d Anand Electronics & Inds. Ltd., which were selec ted in the earlier year (previous year 2006-
07) and also approved by the DRP.
Third Allegation: So far as the use of multiple year data was concerned in the compu tati on of PLI of c omparable companies, the appe llant com pany cou ld not demonstrate as to how the proviso to I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 35 of 61 rule 10B(4) of the Rules was to be invok ed in the circumstances of the appellant c ompany. Even othe rwise also, no specific objection was file d by the appe llant c ompany before the DRP with re gard to rejection of mu ltiple ye ar data by the TP O. Fourth Alle gation: The appellant com pany cou ld n ot furnish an y tenable explanati on to defend its own P LI (i.e. cash profit margin on sale s) and to enable the DRP to rejec t the TPO's contention that ope rating profit margin was m ore re alistic PLI than cash profit margin on sales.
Fifth Alle gation: The appe llant c ompany's con tention that the activities carrie d ou t by it require d huge capital investmen t led to the conclusion that its true profit cou ld not be determined on the strength of the cash profit and hence, pricing of the inte rnati onal tran saction s cou ld n ot enti rely be uncon cerned with depreciation.
Sixth Allegation: The DRP's decision for the previous ye ar re levant assessment ye ar 2006- 07 in approving the PLI se lecte d by the appe llant c ompany (i.e. cash profit margin on sale s) was re levan t to the conte xt of the draft orde r passed by the AO for the earlier year only and therefore, the DRP's approval or disapproval was not necessarily a binding prece dent. In this connection, the appe llant company' s ple a that the re was no change in the operations in the subsequent year (i.e. previous year 2006- 07) had no rele vant.
Seventh Allegation: the appellan t company had faile d to demonstrate as to how in the circum stances of the appellant company c ash profit margin on sales would be the most appropriate PLI of the six PLI pointed out by the appe llant company itse lf.
Eighth Allegation: The appellan t com pany misplace d its re liance in explaining the moot poin t as to which of the ratios between cash profit margin on sales and operatin g profit m argin in the circumstances of the appellant c ompan y truly indicated its profit level. "
23. Ld. Counsel argued that for the AY 200 7-08, the methodology adopted by the DRP was erroneous in so far as for the AY 2006-07 the DRP itself had accepted the cont ention of the assessee that it i s a cash profit m argin on sal es which was the appropriate profit level indicator under th e TNMM m ethod. Now for the AY 2007-08, it was the submission th at the operating profit margin was more r eali stic profit l evel indicator than cash profit margin on sal e was not correct. It was explain ed t hat for the AYs 2004-05, 2005-06 and I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 36 of 61 2008-09, transfer pricing study h ad been done. TNMM m ethod had been applied and the methodology adopted was for the profit level indi cator w as the cash profit margin on sal es and Fin e Line Circuit s Limited w as consid ered as compar able for all the three year s. It is only for the AYs 2006-07 and 2007-08 that a variation has been adopted so as to exclude Fin e Line Circuits Limited and ther eby create an upward transfer pricing adjustm ent resulting in the addition in th e hands of the assessee. Ld . Coun sel for th e assessee rebutted various allegation s mad e by t he DRP, and filed written submi ssions and the r elevant r ead s as und er:-
Rebuttal of the First Allegation made by the DRP against the appellant company 4.3 The DRP alleged that the appellant company did not carry out separate arm's length price analysis for each of the international transactions from (1) to (10) as mentioned in Table No. (1) hereinabove, but benchmarked the aforesaid international transactions on aggregate basis using 'cash profit margin on sales' as the PLI.
4.4 Attention is invited to the rule 10A (d) of the Rules, wherein it has been provided that:
"(d) 'transaction' includes a number of closely linked transactions."
4.5 Reference is invited to the decision of the Hon'ble Pune Tribunal in the matter of Demag Cranes & Components (India) (P) Ltd. Vs. Deputy Commissioner of Income-tax reported in [2013] 30 taxmann.com 364 (Pune - Trib.). The Hon'ble Tribunal inter alia held that rule 10A (d) of the Rules explains the meaning of the expression 'transactions' for the purpose of computation of arm's length price as to include a number of closely linked transactions. On a combined reading of rule 10A(d) and 1-B of the Rules, it comes out that a number of transactions can be aggregated and construed as a single 'transaction' for the purpose of determining the arm's length price, provided of course that such transactions are 'closely linked'. Ostensibly the rationale of aggregating 'closely linked' transactions to facilitate determination of ALP envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of individual transactions can be aggregated and construed as a composite transaction in order to compute arm's length price also finds an echo in the OECD Transfer Pricing guidelines for Multinational Enterprises and Tax Administrations (hereinafter referred to as the 'OECD Guidelines'). In this background, considering the legislative intent manifested by way of rule 10A(d) read with rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions existed, the same should be treated as one composite transaction and a common transfer pricing analysis be I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 37 of 61 performed for such transactions by adopting the most appropriate method. In other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of bench marking with comparable uncontrolled transactions, such an approach can be said to be well established in the transfer pricing regulation having regard to rule 10A(d) of the Rules. It may not be feasible to define the parameters in water tight compartment as to what transactions can be considered as 'closely linked', since the same would depend on facts and circumstances of each case. As per an example noted by the Institute of Chartered Accountants of India (hereinafter referred to as the '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 a common source, being an order or contract or an agreement or an arrangement, and the nature, characteristic and terms of such transactions substantially flow fro m the said common source. It may be noted that in order to be closely linked transactions, it is not necessary that the transactions need be identical or even similar. For example, a 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 the most appropriate methods for each of the above transactions when considered on a standalone basis. However, under particular circumstances, one single method may be chosen as the most appropriate method covering all the above transactions as the same are closely linked.
4.6 In the instant case, the appellant company is engaged only in manufacture and sale of printed circuit boards. The international transactions from (1) to (10) as mentioned in Table No.(1) hereinabove generated from one common source, that is, the business of manufacture and sale of PCBs. We have briefly described the aforesaid international transaction hereinbelow:
§ Your Honours may please find in page no. 97 of the paper book that the raw materials/consumables/spares valued INR 9.24 Thousand were purchased by the appellant company from AT&S AG in a certain emergency situation to meet immediate requirement and to run the production smoothly. § Your Honours may please find in page no 108 of the paper book that two second hand capital equipments valued INR 48.35 Thousand were purchased by the appellant company from AT&S AG for using the same in the production process. § During the previous year 2006-07, a part of the finished products (PCBs) of the appellant company valued INR 1,28,98,46 Thousand was sold to associated enterprise. § Your Honours may please find in page no. 108 of the paper book that in order to take advantage of economy of scale and operational convenience, AT&S AG entered into a global arrangement with various service providers in the area of information technology. The benefit of technology was shared by all the AT&S group companies including the appellant company. The total cost incurred by AT&S AG to provide the I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 38 of 61 shared services to the group companies was distributed among the group companies based on actual usage of the information technology se54rvices. During the previous year 2006-07, the appellant company received shared information technology services from AT&S AG and made payment of INR 115.75 Thousand to the latter for satellite link charges and software used in running the business.
§ Your Honours may please find in page no.97 of the paper book that AT&S AG would charge the appellant company a preliminary warranty of 2% on the sales price relating to its sales of the appellant company's finished goods (i.e printed circuit boards) to end--customers as per the distribution agreement entered into between AT&S AG and the appellant company. During the previous year 2006-07, the appellant company received a sum of INR 113.38 Thousand as warranty claim and repair / re- working income which represented the sum released by the distributor (i.e AT&S AG) on account of no warranty claims arising out of printed circuits boards manufactured by the appellant company.
§ Your Honours may please find in page no.97 of the paper book that the appellant company was sanctioned certain credit facilities i.e. working capital limits arrangement from Deustche and Amro Bank for which the appellant company was required to pay guarantee fee @ 1.5% per annum on the maximum amount drawn on any day in the relevant month to AT&S AG as per the guarantee fee agreement dated 01.04.2004. As per this agreement, the appellant company paid guarantee commission for a sum of INR 121.48 Thousand to AT&S AG for the previous year 2006-
07. § Your Honours may please find in page no98 of the paper book that as per the procurement support agreement dated 10.10.2003 AT&S HK was responsible for employing a professional team to identify suppliers, to evaluate alternative materials, to conduct risk assessment & quality audit and to co-ordinate the process, lead time and supply chain on behalf of the appellant company. To meet the expenses incurred by the team, a nominal 2% of purchase price was agreed to be paid by the appellant company to AT&SHK. As per this agreement, the appellant company paid procurement commission to AT&SHK for a sum of INR 98.52 Thousand during the previous year 2006-07.
§ Your Honours may please find in page no.99 of the paper book that as per the sales support agreement dated 10.10.2003. AT&SHK was responsible to identify and solicit customers on behalf of the appellant company in the overseas market (Asia except India, America and Australia) in return for a commission of 3% on sales per annum. The appellant company paid sales commission to AT&SHK for a sum of INR 61.80 Thousand for obtaining sales services under the aforesaid agreement during the previous year 2006-07.
§ Your Honours may please find in page no.108 & 109 of the paper book that according to the secondment agreement dated 17.9.2002, AT&S AG had undertaken to provide qualified employees to AT&S group companies including the appellant company. During the previous year 2006-07, the seconded employees worked for the appellant I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 39 of 61 company as per the agreement. They received compensation from ATD&S AG, which was reimbursed by the appellant company to AT&S AG(INR 32.166 Thousand) without any mark-up thereto. Further, during the previous year 2006-07, the appellant company incurred travelling and personal expenses (mainly pertaining to airfare and visiting card charges) amounting to INR 16.18 Thousand for employees deputed to it under the aforesaid secondment agreement. AT&S AG reimbursed the aforesaid expenses to the appellant company without any mark--up thereto.
4.7 Your Honours may please appreciate that the aforesaid international transactions were directly linked to the business activity (i.e, production and sale of printed circuit boards) of the appellant company and generated from a common source i.e., manufacture and sale of printed circuit boards by the appellant company. Hence, the transactions were closely linked in view of the decision given by the Hon'ble Pune Tribunal and the Guidelines issued by the ICAI. The aforesaid international transactions could therefore be treated as one composite transaction and a common transfer pricing analysis could be performed for such transactions by adopting the most appropriate method.
4.8 Further, Your Honours may please note that the appellant company adopted the aggregate benchmarking method under the TNMM consistently for all the past assessment years and the later assessment years and the same was accepted by the TPO for all the assessment years and confirmed by the DRP for the assessment year 2006-07. In view of this, Your Honours may please appreciate that the allegation made by the DRP leads to the violation of the principle of consistency pronounced by the Hon'ble Supreme Court of India in the case of Radhasoami Satsang v Commissioner of Income Tax reported in 193 ITR 321 (SC).
4.9 In view of our above submissions, Your Honours may please appreciate that the first allegation made by the DRP has no leg to stand and hence, to be struck down.
Rebuttal of the Second Allegation made by the DRP against the appellant company.
4.10 The DRP alleged that the appellant company had selected the comparable companies as per its own convenience, ignoring consistency and without any apparent reason for not selecting Akasaka Electronics Ltd and Anand Electronics & Inds. Ltd which were selected in the earlier year (previous year 2005-06) and also approved by the DRP, although cash profit margin on sales was used as the appropriate PLI in the earlier year also and the same was approved by the DRP.
4.11 The DRP alleged that though the same PLI (i.e cash profit margin on sales) was selected by the appellant company in TP Report of two consecutive previous years (i.e previous years 2005-06 and 2006-07), two comparable companies viz., Akasaka Electronics Ltd and Anand Electronics & Inds. Ltd which were selected in the earlier I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 40 of 61 year (previous year 2005-06) and also approved by the DRP, were not included in the list of comparable companies by the appellant company in the following previous year (i.e. previous 2006-07). Hence, the DRP held that the appellant company selected the comparable companies as per its own convenience, ignoring consistency and without any apparent reason for not selecting Akasaka Electronics Ltd and Anand Electronics & Inds. Ltd.
4.12 In this connection, reference is invited to page no. 108 of the OECD Guidelines (Chapter III - Comparability Analysis - July, 2010) which describes the comparability analysis as follows:
"Below is a description of a typical process that can be followed when performing a comparability analysis ... ...
Step 1: Determination of years to be covered.
Step 2: Broad-based analysis of the taxpayer's circumstances.
Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested in the case of a transactional profit method), and to identify the significant comparability factors that should be taken into account.
Step 4: Review of existing internal comparables, if any Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability.
Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method).
Step 7: Identification of potential comparables: det4ermining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the comparability factors set forth at paragraphs 1.38-1.63.
Step 8: Determination of and making comparability adjustments where appropriate.
Step 9: Interpretation and use of date collected, determination of the arm's length remuneration..."
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 41 of 61 4.13 As documented in the chapter 'Economic Analysis' of the Transfer Pricing Study Report for the assessment year 2007-08, the appellant company followed the process described hereinbelow to determine the arm's length margin under the TNMM:
Step 1: The appellant company evaluated the controlled transactions [described in (1) to (10) of Table No.(1)].
Step 2: Based on the aforesaid evaluation, the appellant company selected the most appropriate transfer pricing method ('TNMM') for benchmarking the controlled transactions.
Step 3: Depending upon the functional analysis of the parties to the controlled transactions, the appellant company selected itself as the tested party.
Step 4: After selection of the tested party, the search process was carried out by the appellant company in Prowess and CapitalinePlus applying the following filters (comparability criteria):
§ Universe: Total no. Of companies available in the databases. (Prowess: 9801 companies and 1233 segments and CapitalinePlus: 113,887 companies and 158 segments) § Companies for which data were available in the foresaid databases for at least two financial years among the three financial years 2004-05, 2005-06 and 2006-07 were considered.
§ Companies which were functionally comparable with the appellant company were selected.
§ Companies with sales greater than zero were accepted. § Companies with a ratio of total sales from manufacturing activity to total sales less than 90% were rejected.
§ Companies with a ratio of research and development expenses to sales less than 3% were accepted.
§ Companies with a ratio of net fixed assets to sales ratio greater than 500% were rejected.
§ Companies with sales less than INR 1 Crore were rejected. § Companies with net worth greater than zero were accepted. § Companies manufacturing electronic components correlating to the activities of the appellant company were accepted. (3 companies selected such as BCC Fuba India Ltd. Fine-Line Circuits Ltd and Precision Electronics Ltd) Step 5: After selecting the comparable companies, the appellant company selected the appropriate PLI i.e., 'cash profit margin on sales'.
Step 6: The appellant company computed the PLIs of the afo5resaid comparable companies.
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 42 of 61 Step 7: The appellant company computed the arithmetic mean of the PLIs of the afo5resaid comparable companies which is termed as arm's length result.
Step 8: The appellant company computed its own PLI based on the financial information for the assessment year 2007-0 and compared the same with the mean PLI of the comparable companies in order to establish that the controlled transactions were at arm's length.
4.14 In view of the above, Your Honours may please appreciate that the comparability analysis and the subsequent determination of arm's length result is a scientific and methodical process. The search process carried out by the appellant company for the assessments year 2006-07 (earlier year) has no connection with the search process carried out by the appellant company for the current year (assessment year 2007-08). The Prowess and CapitalinePlus databases, which are maintained and updated every year by the Centre for Monitoring India Economy (CMIE) Private Limited and Capital Markets Publishers Private Limited respectively (independent bodies), were used by the appellant company to get external comparables. Your Honours may please note that the PLI 'cash profit margin on sales' was selected by the appellant company at step 5. The ratio had no role to play in the search process carried out by the appellant company in databases at Step 4 by applying various comparability criteria to the companies forming the search universe. After selecting the final comparable companies, the appellant company computed the PLIs of the comparable companies at step 6 and the arithmetic mean thereof at step 7 in order to determine the arm's length result. Thereafter, at step 8, the appellant company computed its own PLI based on the financial information available for the assessment year 2007-08 and compared the same with the mean PLI of the comparable companies in order to establish that the controlled transactions were at arm's length. Hence, the fact that Akasaka Electrnics Ltd and Anand Electronics & Inds. Ltd were selected as comparables companies in the earlier year (i.e. assessment year 2006-07) and approved by the DRP had no role to play in determining the comparable companies for the assessment year 2007-08.
4.15 In view of our above submissions, Your Honours may please appreciate that the second allegation of the DRP has no leg to stand and hence, to be struck down.
Rebuttal of the Third Allegation made by the DRP against the appellant company.
4.16 The DRP alleged that so far as the use of multiple year data was concerned in the computation of PLI of comparable companies, the appellant company could not demonstrate as to how the proviso to rule 10B (4) of the Rules was to be invoked in the circumstances of the appellant company. It was further alleged that even otherwise, no specific objection was filed by the appellant company before the DRP with regard to rejection of multiple year data by the TPO.
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 43 of 61 4.17 In this connection, attention may please be invited to the provision of rule 10B(4) of the Rules, which reads as under:
"(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:
Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared."
4.18 The aforesaid provision was explained by the Hon'ble Bangalore Tribunal in the matter of Philips Software Centre (P) Ltd v. ACIT reported in [20008] 26 SOT 226 (Bang.). The Hon'ble Tribunal has held that the Act and the Rules provided that while conducting the comparability analysis, the data to be used should be contemporaneous. In this regard, the requirement of law is two-fold:
§ As per rule 10B(4) of the Rules, the data to be used for analyzing the comparability of an uncontrolled transaction shall be the data relating to the financial year in which the international transaction has been entered into; and § As per the rule 10D(4) of the Rules, amongst other things, the data which is used for the comparability analysis should exist latest by the specified date mentioned in section 92F (iv) of the Act.
4.19 The Hon'ble Tribunal has further held that rule 10B(4) of the Rules casts an obligation on the taxpayer to conduct the comparability analysis using data for the relevant financial year. However, rule 10D(4) of the Rules makes it mandatory for the taxpayer to take into consideration the data that exists by the time specified by the Act under section 92F(iv) of the Act (i.e. in the March, 2007). Hence, the appellant company could not get current year data i.e. data for the financial year ended 31st March, 2007 for the companies available in the aforesaid databases at the cut-off date i.e. 15th February, 2007. Quarterly financial information, where available, was in abridged form and might be unaudited and hence, could not be used for comparability analysis. However, the appellant company, as far as possible, depending upon availability, also considered companies having their year ending anytime during the financial year 2006-07. Thus the only option available to the appellant company in the aforesaid circumstances was to invoke the proviso to rule 10B(4) of the Rules in regard to the use of financial information of companies relating to the period not being more than two years prior to the current financial year.
4.22 Your Honours may please further note that the purpose of using multiple-
year data was to ensure that the outcomes for the relevant previous year were not unduly influenced by abnormal factors which are briefly described as under:
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 44 of 61
(i) the financial results of comparable companies for any one-year might be distorted by differences in economic or market conditions;
(ii) the participants in an industry might not be uniformly affected by business and product cycles and therefore, differences between dealings might reflected differences in circumstances; and
(iii) this approach of using multiple-year data was consistent with the OECD Guidelines and the Indian Transfer Pricing Regulation. The OECD Guidelines in page no. 129 (Chapter III - Comparability Analysis) has provided that:
"3.76 In order to obtain a complete u9nderstanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price....
3.77 Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability.
3.78 Multiple year data can also improve the process of selecting third party comparables e.g. by identifying results that may indicate a significant variance from the underlying comparability characteristics of the controlled transaction being reviewed, in some cases leading to the rejection of the comparable, or to detect anomalies in third party information."
4.23 Your Honours may please note that the appellant company submitted the reasons for using multiple year data in respect of comparable companies to the DRP vide submission dated 25th July, 2011, which Your Honours may please find in Page no. 142 of the paper book.
4.24 Without prejudice to above, the appellant company submitted the current year data pertaining to financial year 2006-07 during the course of hearing before the TPO, based on which the T PO had made the transfer pricing adjustment in his order. In view of our above submissions, Your Honours my please appreciate that the aforesaid allegations made by the DRP are not relevant in the instant case and hence, to be struck down.
Rebuttal of the Fourth and Fifth Allegations made by the DRP against the appellant company.
4.25 Fourth Allegation: The DRP alleged that the appellant company could not furnish any tenable explanation to defend its own PLI (i.e cash profit margin on sales) I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 45 of 61 and to enable the DRP to reject the TPO's contention that operating profit margin was more realistic PLI than cash profit margin on sales.
4.26 Fifth Allegation: The DRP alleged that the appellant company's contention that the activities carried out by it required huge capital investment led to the conclusion that its true profit could not be determined on the strength of the cash profit and hence, pricing of the international transactions could not entirely be unconcerned with depreciation.
4.27 The appellant company applied the TNMM under section 92C of the Act, read with rule 10B and 10C of the Rules, in order to determine the arm's length margin in respect of the international transactions entered into between the appellant company and its associated enterprises for the relevant previous year. The appellant company selected 'cash profit margin on sales' as the appropriate PLI for the reason that the same eliminated the impact on profitability of differences in the technology, age of assets used in production, differences in capacity utilization and the different depreciation policies adopted by different companies. The TPOO, however, did not accept the aforesaid PLI for the previous year relevant to the assessment year 2007-08. He selected 'operating profit margin' as an appropriate PLI for the appellant company. The DP, in its order, approved the selection of PLI made by the TPO.
4.28 In this connection, reference is invited to the decision of the Hon'ble Panaji Bench of the Income Tax Appellate Tribunal in the matter of Pentair Water India (P) Ltd. Vs. ACIT, Goa reported in [2014] 47 taxmann.com 132 (Panaji). The Hon'ble Tribunal has inter alia held that:
"..... We noted that different companies have adopted different method of depreciation. In fact, for charging depreciation to the Profit & Loss account there are different prevalent recognized methods of depreciation. Some Assessees opt for Straight Line method, some opt for Written Down method and some opt for Sum of Digit method or even Replacement Cost method. Selection of each method will affect the rate and quantum of depreciation even if the nature of the asset is the same and ultimately, the net profit derived by the company will vary. For determining the fair and true profit, in our opinion, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. Therefore, the best way of computing the operating profit, in our opinion, will be to compute the profit before depreciation in respect of each of the company. This will take out the inconformity or the variation in the profit level of the comparables arising due to adoption of different method of charging depreciation ...."
4.29 Reference may pleases be invited to the decision of the Hon'ble Delhi Tribunal in the matter of Schefenacker Motherson Ltd. V. Income-tax Officer reported in [2009] 123 TTJ 509 (DELHI). The Hon'ble Tribunal has inter alia held that:
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 46 of 61 "17 ... ... There is no standard test for deciding what constitute operational income (or profit). What receipts or expenditure would constitute operational income would depend upon facts and circumstances of the case and nature of business involved.
Therefore, Revenue's conclusion that operating profit or manufacturing cost must include "depreciation" irrespective of peculiar facts of case cannot prima facie be accepted as correct. If value of capital assets has got depleted then depleted value is to be taken into account to have commercial "true profit". Depreciation in such a case must be the actual value by which the asset has suffered depletion and not a notional amount under tax or company law or some policy or statutory provision....."
4.30 In view of the above decisions, Your Honours may please appreciate that the best way of computing the operating profit is to compute the profit before depreciation (i.e cash profit), as the actual depletion in the value of depreciable fixed assets is never computed and presented in the audited financial statements of an Indian company. The provision for depreciation in respect of various fixed assets employed by a company is computed as per the rates prescribed by the Companies Act, 1956 and debited to the Profit & Los Account of the company. Accordingly, the cumulative depreciation figure is presented in the Balance Sheet of the company as a deduction from gross value of fixed assets employed by the company. Hence, the profit figure, net of depreciation, does not indicate the 'true profit' of the company as explained in the aforesaid decisions. Going by the decisions given by the Hon'ble Tribunals as mentioned hereinabove, Your Honours may please appreciate that the higher the volume of investment in fixed assets and consequently, the higher the amount of provision for depreciation calculated a per the Company's Act, 1956, the higher will be the deviation from 'true profit' which would have been computed had the actual amount of depletion of fixed assets been taken into consideration by a company in arriving at the profit net of depreciation.
4.31 Your Honours may please note that the appellant company filed detailed submission with the DRP in favour of selection of 'cash profit margin on sales' as an appropriate PLI vide letter dated 20th May, 2011, which Your Honours may please find in page no. 125 and 126 of the paper book.
4.32 Your Honours may please further note that the appellant company had used the aforesaid PLI for assessment year 2004-05, assessment year 2005-06 and assessment year 2008-09 and the same was accepted by the Tax Authority for the aforesaid assessment years. The aforesaid PLI was also approved by the DRP for the assessment year 2006-07. In view of this, Your Honours may please appreciate that the allegations made by the DRP leads to the violation of the principle of consistency pronounced by the Hon'ble Supreme Court of India in the case of Radhasoami Satsang v Commissioner of Income Tax reported in 193 ITR 321 (SC).
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 47 of 61 4.33 In view of our above submissions, Your Honours may please appreciate that the DRP's allegations (fourth and fifth allegations) are not sustainable and hence to be struck down Rebuttal of the Sixth Allegation made by the DRP against the appellant company 4.34 The DRP in the current year (assessment year 2007-08) alleged that the decision given by the DRP in the earlier year (assessment year 2006-07) in approving the PLI selected by the appellant company (i.e. cash profit margin on sales) was relevant in the context of the draft order passed by the AO for the earlier year only and therefore the DRP's approval or disapproval was not necessarily a binding precedent. In this connection, he further alleged that the appellant company's plea that there was no change in the operations in the subsequent year (assessment year 2007-08) had no relevance.
4.35 Your Honours may please note that the industry in which the appellant company operates is a technology-intensive industry. The appellant company selected the ratio of cash profit margin on sales as an appropriate PLI in order to eliminate the impact on profitability of differences in the technology adopted, age of assets used in production, differences in capacity utilisation and the different depreciation policies adopted by the comparable companies. The use of 'cash profit' as the numerator of PLI has been confirmed by the decision of the Hon'ble Panaji Tribunal in the matter of Pentair Water India (P) Ltd vs. ACIT, Goa (supra) and the decision of the Hon'ble Delhi Tribunal in the matter of Schefenacker Motherson Ltd. V. Income-tax Officer (supra). It was extremely difficult for the appellant company to have detailed information on comparable companies regarding technology used, ages of assets used in production process etc., from the annual reports and databases (Prowess and CapitalinePlus) and then to make reasonably appropriate adjustments in connection therewith too ensure comparability. Based on this principle, the aforesaid PLI was accepted by the Tax Authorities for the assessment years 2004-05, 2005-06 and 2008-09 and also by the DRP for the assessment year 2006-07. The DRP for the assessment yar 2007-08 could not appreciate the aforesaid principle and the benefits received by the appellant company from using this PLI in TNMM analysis. The DRP for the assessment year 2007-08, without application of mind, alleged that the selection of PLI would vary from year to year depending upon the facts and circumstances of the case. Your Honours may please appreciate that the aforesaid allegation of the DRP was misconceived because the determination of PLI, in the absence of any change in the functions performed / assets employed / risks assumed by the appellant company, would remain unchanged from year to year. In the instance case, there was no change in the functions performed / assets employed / risks assumed by the appellant company between the two consecutive assessment year (i.e assessment year 2006-07 I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 48 of 61 to assessment year 2007-08) and hence, the allegation made by the DRP for the assessment year 2008-09 was misplaced.
4.36 Further, Your Honours may please note that the appellant company selected the PLI 'cash profit margin on sales' for the assessment year 2004-05, 2005-06 and 2008-09 and the same was accepted by the Tax Authorities for the respective assessment years. The search processes were documented in page no. 207 of the paper book (Transfer Pricing Study Report for assessment year 2004-05), page no. 213 of the paper book (Transfer Pricing Study Report for the assessment year 2005-
06) and page no. 219 of the paper book (Transfer Pricing Study Report for the assessment year 2008-09). In this connection, we would like to invite the attention of Your Honour to the facts that:
§ There was no transfer pricing adjustment in the appellant company's case for each of the aforesaid assessment years (please refer to page no. 209, 215 and 221 of the paper book).
§ Fine-Line Circuits Ltd was selected as a comparable company for each of the aforesaid assessment years by the appellant company and the same was accepted by the TPO/AO. (please refer to page no. 205, 211 and 217 of the paper book) 4.37 In this connection, attention may please be invited to the judgment delivered by the Hon'ble Supreme Court of India in the matter of Radhasoami Satsang v Commissioner of Income Tax reported in 193 ITR 321 (SC) wherein the Hon'ble Supreme Court has inter alia held as under:
"We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one yaer may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings, in the absence of any material change justifying the Revenue to take a different view of the matter - and, of thee was no change it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken ... ... ...
"Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be proper apprehensions by the Court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted, and there is abundant authority reiterating that principle.... "
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 49 of 61 4.38 In this connection, reference is invited to the decision of Hon'ble Mumbai Tribunal in the case of DCIT vs. Reuters India (P) Ltd reported in [2013] 33 taxmann.com 481 (Mumbai - Trib.) for assessment year 2005-06. The Department Representative argued before the Hon'ble Tribunal that the rule 19B (1)(e) of the Rules did not permit the adoption of cash profit. He accentuated on that the aforesaid rule provides for taking only the net profit in numerator with varying denominators whose selection depends upon the act and circumstances of each case. In the opposition, the Learned Counsel for the assessee argued that in the order passed by the TPO in assessee's own case for the assessment year 2007-2008, cash profit/operating cost was accepted as the PLI. Similar position was demonstrated in respect of the order passed by the TPO for assessment year 2008-2009 also. The Hon'ble Tribunal held that the TPO himself accepted the ratio of cash profit/operating cost as the correct PLI in assessee's own case for assessment years 2007-08 and 2008- 2009 and in this regard, the principle of consistency could not be ignored. The Hon'ble Tribunal held that the learned CIT(A) was justified in applying cash profit/operating cost as the correct PLI under TNMM.
4.39 In view of the above decision, Your Honours may please appreciate that the DRP has violated the 'principle of consistency' pronounced by the Hon'ble Apex Court in the matter of Radhasoami Satsang v Commissioner of Income Tax (Supra) and followed by the Hon'ble Mumbai Tribunal in the case of DCIT vs.Reuters India (P) Ltd. (supra). Though there was no material change in the circumstances in which the appellant company operates, the DRP in the current year rejected the PLI (i.e 'cash profit margin on sales') which was approved by the DRP in the earlier year and also approved by the TPO for the assessment year 2004-05, 2005-06 and 2008-09. Similarly, Fine-Line Circuits Ltd was accepted as a comparable company by the TPO for the assessment year 2004-05, 2005-06 and 2008-09. However, the DRP, in the current year, confirmed the action of the TPO in excluding the aforesaid company from the list of comparable companies based on the action of the DRP in the earlier year (i.e previous year 2005-06 / assessment year 2006-07).
4.40 In view of this, Your Honours may please appreciate that the actions of the DRP inn confirming the rejection of cash profit margin on sales as an appropriate PLI and also in confirming rejection of Fine-Line Circuits Ltd as a comparable company were not sustainable as the aforesaid actions violate the principle of consistency pronounced y the Hon'ble Apex Court in the aforesaid decision. Your Honours may please further appreciate that the allegation made by the DRP in the current year s regards the non-binding effect of the DRP's decision in the earlier year in respect of selection of PLI has no leg to stand and hence, to be struck down.
4.41 Reference is further invited to the decision of the Hon'ble Calcutta High Court in the matter of Birla Corporation Ltd. V. Commissioner of Income-tax - II, I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 50 of 61 Kolkata reported in [2014] 43 taxmann.com 267 (Calcutta), which inter alia reads as under:
"8 ... He added that the department has to have some consistency in its views and it cannot below hot and cold at its sweet-will.
11. After hearing the learned advocates appearing for the parties, the question no.1 is answered in the negative and in favour of the assessee ..."
4.42 Reference is further invited to the decision of the Hon'ble Mumbai Tribunal in the matter of Dr. Suryakant Nannalal Gandhi (Ind.) v. ITO reported in [2012] 17 taxmann.com 207 (Mum.), wherein the Hon'ble Tribunal inter alia held that:
"7. ....It c annot be open to the Asse ssing Officer to blow hot an d cold at the same time. ........ ........ He ought to have at least de alt with the merits of the issue and e xamined if different con siderations must apply here. There was thus cle ar incongrui ty in the approach of the AO and this intricacy is indeed errone ous an d prejudicial to the interest of the revenue inasmuch as the very reasons for which the foreign travel expense s has been disallowed having n ot been taken into account for the purposes of e xamining the actu al e xpenditure of such travel".
4.43. You r Hon ours m ay please n ote that the DRP in the current year alle ged that the DRPs approval or disapproval for the aforesaid PLI in the earlier ye ars was n ot necessarily a binding preceden t. However, the DRP in the current ye ar confirme d th e following vie w of the TPO without any valid reason and further investigation that:
Furthe r if the filter of N FA/sales is applied as done by DRP, Kolk ata for AY 2006-07 the less intensi ve company Fine Line Circuits ltd. is au tom atically rejec ted. Hence, there is no further adju stment required for de preciation and working capital as the filter has resu lted in elimination of less capi tal intensive comparables.
4.44. In view of the above, You r Honou rs m ay please appreciate that the DRP had not maintained consiste ncy in view and it had been blowing hot an d cold at the same time at i ts sweet will. On the one hand, when the questi on of accepting cash profit m argin on sales as an appropriate PLI arose, the DRP in the current ye ar stated that the DRP's approval or disapproval f or the aforesaid PLI in the earlier ye ar was not necessarily a binding prece dent. On the other han d, when the TPO rejected Fine Line Circuits Ltd. based on the action of the DRP in the earlie r year, the DRP approved the same withou t valid reason and further investigation. You r Hon ours may ple ase fu rther note that while conducting se arch process in Prowess and Capital line Plu s database s, the appellan t com pany applied the se arch criterion com panies with a rati o of net fixed assets to sales ratio greater than 500% were re jected with a view to e liminating companies with excessive unu tilised asse ts.
Fine Line Circuits Ltd. satisfied the aforesaid c omparability crite rion.
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 51 of 61 The aforesaid c omparability c riteri on was applied by the appellan t company in the TP re port for the assessment years 2004- 05, 2005-06 and 2008- 09 and the same was accepte d by the Tax Authority.
4.45. In view of ou r above submissions, you r Honou rs may please appreciate that the actions of the DRP in confirming the re jection c ash profit margin on sales as an appropriate PLI and also in confirming the rejection of Fine Line Circuits Ltd. as a comparable company are not sustainable and the allegations made by the DRP as aforesaid have no leg to stand and hence to be struck down. We humbly pray to You r Hon ours to conside r cash profit margin on sale s as the appropri ate PLI for the appe llant c ompany and Fine Lin e Circuits Ltd. as a com parable company.
Rebuttal of the Seventh an d Eighth Allegation m ade by the DRP against the appellan t com pany.
4.46. Seventh Allegati on: The DRP allege d that the appe llan t company h ad faile d to dem onstrate as to how in the circumstances of the appe llant company cash profit margin on sales wou ld be the most appropriate PLIs out of the six PLIs pointed out by the appellan t company itse lf.
4.47. Eighth Alle gati on: The appe llant c ompany misplaced i ts reliance in explaining the moot point as to which of the ratios between cash profit m argin on sales and operating profit m argin in the circumstances of the appe llant c ompany truly indicated its profit le vel.
4.48. Reference may ple ase be invited to page no. 116 of the paper book, wherein Your Honou rs may please find that the appellan t company submitte d to the DRP some PLIs which could be used for determining arm's length price under the TNMM) prescribed by the Institute of Chartered Accountants of In dia in their 'Guidance Note on Report on Inte rnational Tran saction s under section 92E of the Income Tax Act, 1961 (Transfe r Pricing)". The ratios are as unde r:-
(i) Ratio of net profit before tax to sales,
(ii) Ratio of net profit before interest an d tax to sales;
(iii) Ratio of cash profit to sales;
(iv) Ratio of net profit bef ore tax to sh areholde rs funds;
(v) Ratio of ne t profit before interest and tax to asse ts,
(vi) Berry rati o - rati o of ope rating cost to ope rating revenue.
4.49. We have desc ribed the aforesaid ratios in nutshell he reinbelow:
The ratio of ne t profit before tax to sales or the ratio of net profit before inte rest and tax to sales: You r Honour m ay ple ase note that the rule 10B(1)(e) of the Rules provide s for the application of ne t profit margin in relation to sales effected by an enterprise as a PLI. In the first ratio, the numerator represents net profit before tax, where as in I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 52 of 61 the second ratio, the numerator represents net profit before inte rest and tax. The aforesaid ratios are good i ndicators of the total re turn to the business activity. As the appellant company is engage d in technology intensive industry, there is a need to take care of the factors such as differences in the technology used, age of assets used in production, differences in capacity utilisati on and the different depreciation policies adopted by the companies to ensure comparability. Howeve r, it is e xtreme ly difficult for the appe llant company to get de tai led inform ati on on the afore said fac tors from the annual reports of the com parable companies and from the database s used by them, it is n ot appropriate to use the aforesai d ratios as PLI.
The ratio of cash profit to sales eliminates the impact on profitabi lity of differences in the technology use d, age of asse ts use d in producti on, differences in capacity utili zation an d the different depreciati on policies adopted by the companies. We have vari ous judicial precedents in which the use of cash profit as numerator of PLI has been approved by the Hon'ble Tribunals of the country such as the decision given by the Hon'ble De lhi Tribunal in the case of Schefenacker Motherson Ltd. - vs.- Income tax Officer re porte d in [2009] 123 TTJ 509 (de l.) and the decision given by the Hon'ble Pan aji T ribunal in the case of Pentair Water India (P) Ltd. -vs. - ACIT, Goa reporte d in [ 2014] 47 Taxman.c om 132 (panaji). As the appe llant com pan y is operating in a technology intensive industry, this is an appropriate PLI for the appe llant company. Further, detai led submissions with respect to the acceptance of this ratio have been given herein above.
You r Honour may ple ase note that the rule 10B 91)(e0 of the Rules provides f or the application of net prof it margin in relation to assets employed or to be employe d by an ente rprise as a PLI. The ratio of net profit before tax to shareholders funds or the ratio of ne t profit before interest and tax to asse ts is used only when the teste d party's ratio of fixed assets to total asse ts is quite high or if the tested party employs substantial working c apital that plays significant role in generating ope rating capital. In the appellan t com pany's c ase, the value of fixe d assets (net block plus capital work in progre ss) as on 31 s t March, 2007 stood at INR 834, 544 thousand, whereas the total asse ts (=ne xt fixed assets+ investmen ts + defe rred tax asse ts + net current assets) stood at INR 1,334, 660 Thou sand. Hence, the ratio of the fixed assets to total assets ratio was not so high as to ju stify the use of the aforesaid ratios as PLI.
Berry ratio focuses on com paring the gross profitability of an ac tivity and ope rating expenses necessary to c arry it out. A situation whe re berry rati o can prove useful is for intermediary activities, where a taxpayer purchases goods from an associated ente rprise and on-sells them to other associated en terprise s. Howeve r, the appe llant company I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 53 of 61 is engaged in manufactu re and sale of printe d circuit boards and as such berry ratio is n ot an appropri ate P LI for the appe llant com pan y.
4.50. In this connection, reference is invited to the decision of the Hon'ble Hyderabad Tribunal in the matter of B A Continuum Indi a (P) Ltd. -vs.- ACIT re porte d in [2013] 40 Taxman .com 311 (Hyderabad- Trib.), wherein it has been held th at :
The Tribunal in the case of Qual Core Logic Ltd. -vs.- Dy. CIT [ 2012] 22 taxman.c om 4/52 SOT 574 (Hyd.) held as unde r:-
57. .....It is evident f rom statutory provisions that it is nowhere provided that deducti on of de preciation is a must. De preciation can be taken into account or disregarde d in computing profit de pending upon the context and pu rpose for which profit is to be compute d. There is no formula which would be applicable unive rsally and in all circumstances.
Net profit used in Rule 10B c an be taken to mean c omme rcial profit......In the case in hand, revenu e authorities went wrong in disregarding the conte xt and pu rpose for which the net profit was to be compute d. Depreciation, which can have varied basis an d is allowe d at different rate s, is n ot such an expenditure which must be deducte d in all situations.. ...Object and purpose of the transfe r pricing to com pare like with the like, and to e liminate differences, if any, by suitable adjustment is to be seen. ....".
4.51. In view of the aforesaid decision, your Honours may please note that the net profit use d in ru le 10B( 1)(e) of the Rules can be taken to mean comme rcial profit. De preciation, which can have varied basis and is allowe d at different rates, is not suc h an expenditu re that must be deducted in all situations to arrive at the comme rcial profit. Your Hon ours may please further n ote that the industry in which the appe llant c ompany operate d du ring the relevant previ ous ye ar was a technology-intensive industry. The af oresaid PLI was selecte d by the appe llant c ompany in order to e liminate the impact on profitability of differences in the technology use d, age of assets used in production, differences in capacity utili zation an d the different depreciati on policies adopted by the comparable companies, as it was extreme ly difficult for the appe llant company to have detailed inform ation on comparable companies regarding technology use d, age s of asse ts used in production process e tc. from the annual reports and databases (Prowess and capital Line Plus) an d then to make reasonably appropriate adjustments in connection therewith. Hence, Your Honou rs may please appreciate that in the instant case, the PLI se lected by the appe llant c ompany, (i.e. cash profit m argin on sales) indicated the true profit of the appe llant c ompany an d the appellant c ompany cannot be said to have violated rule 10B( 1)(e) of the Rules in selecting cash profit as the comme rcial profit. Further, in view of the afore said decision, the objecti on of tran sfer pricing is to compare like with like and to eliminate differences, in the instant c ase, Your Honours m ay ple ase note that de preciation was n ot deducte d from profit while c ompu ting I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 54 of 61 the PLI of the appellan t company as we ll as the comparable com panies and hence, the object of transfer pricing to c ompare like with like and to e liminate differences has been fu lfille d.
4.52. You r Hon our may please note that the Hon'ble DRP approve d the selection of cash profit margin on sales as an appropriate PLI in the appe llant company's case for the assessment year 2006- 07. Howeve r, though there was no change in the circumstances, in which the appe llant com pany operated in the subsequent ye ar (i.e. previous year 2006- 07/ assessment year 2007- 08), the DRP rejected the afore said rati o as a P LI. Fu rther, the afore sai d ratio was accepted as an appropriate PLI by the Tax Authority for the assessmen t years 2004- 05, 2005- 06 and 2008- 09.
4.53. in view of ou r above submission s, You r Honou rs m ay please appreciate th at the aforesaid alle gations made by the DRP are not sustainable and hence to be struck down.
Computation of ar m's length price 4.54. You r Hon ours m ay ple ase find in page no. 71 and 72 of the pape r book (ple ase refer to Table No. X i n the order) that the TPO in his orde r provi ded the cash profit m argins of the comparable com panies and that of the appellan t company which were compute d by the appe llant com pany based on curren t year data (i.e. previous year 2006- 07/ assessmen t ye ar 2007-08). The afore said rati os are as follows:-
Table No. (2)- Compu tation of P LI Name of com parable company Cash profit margin on sales BCC Fuba India Ltd. 18. 49% Fine Line Circuits Ltd. 11. 33% Precision Electronics Ltd. 19. 45% Arithmetic Mean 16. 42% Tested Party 13. 39% 4.55. We have furnished hereinbelow the computation of arm' s length ope rating income based on the data furnished in T able N o. 2:
Table No. (3) - Com putation of Arm's Le ngth Ope rating Income Particulars Page refe rence of paper book Arm's length cash profit 16, 42% 71 and 72 margin on sales ( A) Cash profit margin on 19. 65% costs : [ 16. 42/(100-
16. 42) x100....(B) INR 000 Cash expenses L C) 171,65, 00 60 I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 55 of 61 Arm's Length Cash 3,37, 292 Profit: C*B Arm's Len gth Ope rating 20, 53,792 Income: [(C)=+ (C * B)] 4.56. We have furnished hereinbelow the tolerance band of +5% in view of the proviso to section 92C of th e Income T ax Ac t, 1961 [ prior to the amendmen t m ade by Finance (No. 2) Act, 2009]:
Table No. 4 - Tolerance Band : Finance Year 2006- 07 (INR'000) Particulars Actual Page Arm's -5% +5% reference Length of pape r book Operating 19, 81,839 60 20, 53,792 19, 51,102 21, 56,482 income Less Cash 17, 16,500 60 17, 16,500 17, 16,500 17, 16,500 expense s Cash profit 2,65, 339 60 3,37, 292 2,34, 602.4 4,39, 981.6 Cash profit 13. 39% 60 16. 42% 12. 02% 20. 40% margin on sales (PLI) 4.57. In view of the above compu tati on, Your Hon ours may ple ase note that the arm's length PLI being 16.42%, the tole rance band of +5% would be in the range of 12.02% to 20. 40% . the actual PLI of the appe llant com pany is 13.39% falls wi thin the range of 12. 02% to
20. 40% . Hence, Your Honou rs may please appreciate that the internati onal transacti ons entere d into by the appe llant com pany wi th its associated ente rprises during the relevant previou s ye ar we re at arm's length ".
24. In vi ew of above submi ssion s Ld. Counsel for the assessee argued that the NFA to sales bei ng the methodology adopted by the Tr ansfer Pricing Officer having been not found to be the correct method by the DRP for the assessment year 2006-07 and the assessee's method of computing the operating profit by con sidering the p rofit before d epreci ation being cash profit to sal es m ethod for arriving at the appropriat e profit level indicator which had also been accept ed by the DRP for the assessmen t year 2006-07 and which was also the m ethodology adopted for AYs 2004-05, 2005-06 and 2008-09, wherein no transfer pricing adjustment h ad been made. According I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 56 of 61 to him, the DRP ought not to have directed the AO to exclude Find Lin e Circuits Limited because the NFA to sales ratio was signi ficantly lower than that of the assessee. He stat ed that the DRP having accepted the correctn ess of the methodology adopted by th e assessee for arriving at the profit level indicator could not have used the di scarded method just for the purpose of excluding one of the comparables. He admitted that each assessment year i s a sep arat e unit but when th ere ar e no ch ange in th ese fact s and circumst ances, the methodology adopted for the earli er years and such possession having been sust ain ed, the same could not be changed in a subsequent year and concept of consi st ency was to be consid ered and th e methodology for arrivi ng at the PLI could not be chang ed year after year unless ther e i s any ch ange in the fact s for that relevant AY. He placed reliance upon the decision of the Hon'ble Suprem e Court in the case of Radhasoami Sat sang v CIT 193 ITR 321(SC) as also th e decision of the Hon'ble Jurisdict ional High Court in th e case of Birla Corporation Limited (2014) 43 Taxman.com 267 (Cal). Hence, h e urged that the addition made under transfer pricing adjustment was liable to be d elet ed.
25. In reply, SR DR vehementl y supported the order of the Disput e Resolution Panel and the Assessing Offi cer.
26. We have consid ered the rival submissi ons and gone through facts and circumstances of th e case. At the outset, peru sal of th e DRP's directions for the AY 2006-07, the DRP h as direct ed for exclu sion of Fin e Lin e Circuit s Limited on the basi s of the NFA to sales. The DRP admittedly has not speci fied as to which is the appropriate profit level indicator? Whether it is a cash profit margin or whether it is operating profit margin. However, the DRP repeatedly talks of applying the cash pr ofit margin. If cash profit m argin i s to be con sider ed as the most appropriat e profit level indicator, then obviou sly the NFA to sales ratio cannot be appli ed as th at would be a filter which i s more appropriate when adopting the operating profit to sales method for arriving at the PLI. Admitt edly, p erusal of Transfer Pricing Study and orders for AYs 2004-05, 2005-06 and 2008-09 show that the cash profit margin to I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 57 of 61 sal es is the m ethod adopted for arrivi ng at th e appropriate PL I for th e said AYs. In th ese circumst ances, admitt edl y the principles of consi st ency would have to be followed and the method ology followed for the earlier years cannot be tinkered with or modifi ed ju st for the purpose of assessm ent year s in betw een with no vari ation in the facts and circumst ances are available for the two AYs. In these cir cumstan ces, we direct that in the assessee's case most appropriate PLI is to be arri ved at by applying the cash profit margin to sal es r atio. Thi s admittedly i s also in line with the r equir ement s of TNMM method prescri bed und er section 92CA(2) of the Act r ead with Rule 10B and 10C of the Income Tax Rules, 1962. Once it is h eld that appropriat e PLI i s to be arrived at by applyi ng the ratio profit margin to sales ratio, then obviousl y the filter represent ing the NFA to sales ratio for filtering the comparabl es cannot be applied . This is because NF A to sales has nothing to do with the cash profit margin s g ener ated by an assessee. Further for applying the filt er of NFA to sales r atio of the comparabl es, an aver age of five year s h as been consider ed representi ng two year s pr ior and two years subsequen t. This again would der ail the exact purpose and th e applicabilit y of th e TNMM method in so far as th e AY under disp ute is the AY s 2006-07 and 2007-08.
However, when the NFA to sales r atio for the five years average i s consider ed, it takes into considerat ion the AYs 2004-05, 2005-06 and 2007- 08 for which years in the Transfer Pricing Study the said computation itself had not been adopted and Fin e Line Circuits Limited was con sidered and accepted as compar ables by the Tr ansfer Pricing Officer and th e assessee. Here it i s noticed that th e NFA to sales filter has been appli ed exclusively for the purpose of exclusion of one of the comparables out of the four, which have been consi st ently adopted as a comparable for earlier and subsequent AYs. In these circumstances, w e are of the view that the NFA to sales filt er cannot be applied and result of Fine Line Circuits Limited is liable to be consider ed when computing the profit level indicator in the Tran sfer Pricing Study. Once Fine Lin e Circuits Limit ed is also con sidered and the same methodology as adopted for the earli er years being th e cash profit margin to sal es ratio i s applied for arriving at the appropriate profit level indicator , I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 58 of 61 then admittedly no addition remain s in the hands of the assessee on account of the Tran sfer Pricing. In th ese circu mstances, th e AO is direct ed to d elete the addition made on account of arm's length price for the AY 2006-07. As the fact s ar e iden tical for the AY 2007-08 on similar grounds, the addition made by the Assessing Officer for the AY 2007-08 also stands delet ed. Hence, this common issue in both AYs of assessee's appeal is allowed.
27. The next i ssu e in this appeal of the assessee (in ITA No. 2071/Kol/2010 for AY 2006-07) is again st the order of DRO & AO in disallowing the exp enses of Rs.6 ,810/- by holding that the same ar e incurred for earning exempted income and thereby invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. For this, assessee has rai sed following ground no. 7 to 12:
"7.That the learned Assessing Officer has erre d in disallowing the business expenditure of Rs.6, 810/- by invoking the provisions of section 14A of the Act read with Rule 8D of the Rules.
8.That the le arned AO has e rre d in stating that f or e arning income , expense s have to be incurred and income earning cann ot be autom atic.
9.That the le arned AO has erred in invoking provisions of section 14A(2) r. w. Rule 8D for the assessm ent year 2006-07 while the provisions are applicable on ly from assessment year 2007- 08 and onwards.
10.That learned AO has erred in disregarding the assesse e's contention that dividen d income was exempt unde r section 10( 34) of the Act and that was earned through investment in equi ty shares m ade during the earlier ye ars an d no fresh investment was made an d no expendi ture was incurred in realising the dividend.
11.That without prejudice to the above, the le arne d AO has erred in considering that the assessee earned dividend income of Rs.25, 203/-, whereas factually, the assessee had earned Rs. 24,570/- on this account.
12.That without prejudice to the above, the AO has erred in considering the ave rage value of investment of Rs.13, 62,000/- under rule 8D( 2)(iii) of the Rules, instead of Rs. 3,84, 000/- only."
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 59 of 61
28. The fact s ar e that the assessee has earned divid end income at Rs.24,570/- and not the sum of Rs.25,2 03/- as noted by the AO. Non e of th e authorities i.e. th e AO or th e DRP h as gone into th e i ssu e and summarily made disallowance by in voking the provision s of Rule 8D. This issue i s covered by the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.), wherein it is held that Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective. Hence, this provision will not apply to relevant AY 2006-07, which is under dispute. The Tribunal is taking a consistent view that prior to AY 2008-09, when Rule 8D will apply, the disallowance be restricted at 1% of the exempted income u/s. 14A of the Act. We direct the AO accordingly. This issue of assessee's appeal is partly allowed.
29. The next i ssu e in this app eal of assessee (in ITA No. 2071/Kol/2010 for AY 2006-07) is against the order of AO not allowing credit for TDS amounting to Rs.1 ,58,430/-. For this assessee has raised following ground no. 14"
"That the learned AO e rred in n ot giving credit for taxes deducte d at source amoun ting to Rs. 158, 430/- while dete rmining the tax payable. "
30. We direct the AO to give credit for TDS while giving appeal effect t o this order aft er allowing reasonable opportunity of being heard to th e assessee and in case assessee produces TDS certificat es or in case it has alread y filed the sam e may be taken int o consideration.
31. The next i ssue in thi s app eal of assessee (in ITA No. 2071/Kol/2010 for AY 2006-07) is ag ain st the order of AO charging inter est u/s. 234B and 234D of the Act . For this, assessee has r aised following ground no. 15:
"That the learned AO erre d in levying interest of Rs.24,927, 980/- under sec tion 234B of the Act, and Rs. 563,550/- un der section 234D of the Act. "
32. We are of the view that charging of interest u/s. 234B and 234D of the Act is procedural and consequen tial. Hence, the AO will recompute the interest under both the sections while giving app eal effect to thi s order as per law.
I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 60 of 61
33. The next i ssu e in this app eal of assessee (in ITA No. 2071/Kol/2010 for AY 2006-07) is again st the order of AO not considering the i ssuance of refund order u/s. 143(1) of the Act . For this, assessee has rai sed following ground no. 16.
"The learne d Assessing Officer e rre d in considering the effect of the refund order issued unde r section 143(1) of the Act, when in fact the same has never been issued to the assessee."
34. We are of the vi ew that the assessee can take up the issue with the AO and take appropriat e step as per law .
35. The next issue in this appeal of assessee (in ITA No.779/K/2012) for AY 2007-08 is as reg ards to the order of AO & DRP disallowing the paymen ts made to AT&S towards reimbursement of technology costs being expen ses on connectivit y and softwar e charges. For this, assessee has rai sed following ground no. 8:
"(8)(a) That the learned AO and the learned Panel e rre d in disallowing Rs.1, 15, 74,726/- being payments made to AT&S Austria towards reimburse ment of Informati on Technology costs being expense s on connectivity charges and software, without appreciatin g appe llant's conten tion.
(b) That the le arne d AO and the le arne d Panel erred in confirmin g the order of the AO disallowing the aforesaid sum of Rs.1, 15, 74,726/-
paid to AT&S Austri a, by applying the provision s of section 40(a)(i) of the Ac t.
(c) That the learned AO an d the learne d Panel has not appreciated the fact that the impugne d am ount does n ot c onsti tute incom e chargeable to tax in the hands of AT&S Austria or respec tive vendors and consequently no tax was require d to be deducte d at source therefrom.
(d) That the learned AO an d the learne d Panel erred in not following the Jurisdiction al T ribunal orde r in the appe llant's own case f or the AY 2002-03, 2003-04 an d 2004- 05."
36. At the outset , it i s to be mentioned t hat this issue has already been dealt with in assessee's app eal in IT A No. 186/K/2011 for AY 2005-06, in this very order at p aras 13 to 18. The fact s and circum stances are exactly identical in thi s r elevant AY 2007-08 what was in AY 2005-06. Hence, taking I TA Nos . 1 2 6 2 / K / 2 0 1 0 , 1 8 6 /K / 2 0 1 1 , 2 0 7 1 / K / 2 0 1 0 & 7 7 9 / K / 20 1 2 AY: 2 0 0 5 - 2 0 0 6 , 2 0 0 6 - 0 7 & 2 0 0 7 - 0 8 Page 61 of 61 a con sist ent vi ew, w e dir ect th e AO to d elete this di sallowance. This issue of assessee's app eal is allowed.
37. In the result, revenu e's appeal in ITA No. 1262/K/2010 is dismissed. Assessee's appeal in ITA No. 186/K/2011 is allowed. Assessee's App eal in ITA No. 2071/K/2010 is partly allowed. Assessee's app eal in ITA No. 779/K/2012 is allowed.
Order pronounced in the open Court on 29th Janu ary, 2015.
Sd/- Sd/-
Shamim Yahya Mahavir Singh
(Accountant M ember) (Judici al Mem ber)
Kolkata, the 29th day of January, 2015
Copies t o : (1) Deputy /A dditional Commis sioner of Inco me Tax,
Circle/Range-1 1, Kolkata,
P-7, Chowringhee Square,
Kolkata-700 06 9
(2) M/s. A T & S India Pvt . Limited ,
12A , Industri al Area ,
Nanjangud ,
Mysore,
Karnataka-5 71 30 1
(3) Commissioner o f Income-tax (Ap peals)
(4) Commissioner o f Income Tax
(5) The De partmental Re presentative
(6) Guard Fil e
By orde r
Assistant Registrar
Income Tax Appe llate T ribunal
Kolk ata Benches, Kolk ata
Laha/Sr. P.S.