FORD INDIA PRIVATE LIMITED,CHENGALPUT V. DCIT, CHENNAI

ITA 669/CHNY/2017

AI Insights

The case involves Ford India Private Limited (FIPL), which appealed against the order of the Deputy Commissioner of Income Tax (DCIT) concerning the assessment year 2012-13. The primary issues in the appeal included transfer pricing adjustments proposed by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP), and corporate additions made by the Ld. AO. The TPO had proposed significant adjustments based on the valuation of international transactions and the application of transfer pricing methods. The Tribunal's decision addressed the legality and appropriateness of these adjustments, the rejection of certain comparables, and the treatment of brand development fees and product development expenses.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 46659 (ITAT-CHENNAI)
• Duration Of Justice: 7 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 26-08-2024
• Assessment Year: 2012-2013
• Appeal Filed On: 20-03-2017
• Other Referred Cases: Virtusa Consulting Services Pvt Ltd vs. DCIT, General Motors of India vs. DCIT, LG Electronics Pvt Ltd vs. DCIT, Nippon Paints Pvt Ltd vs. ACIT, Hyundai Motor India Pvt Ltd vs. ACIT, Maruti Suzuki India Ltd vs. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C. VATCHALA
• Assessee Lawyers: AJIT KUMAR JAIN
• Keywords: Set aside; Business income; Opportunity of being heard; Transfer pricing; International transaction; Retrospective amendment; Corroborative evidences; Depreciation; Principle of natural justice; TDS; Unabsorbed depreciation; Initiation of penalty proceedings; Double taxation relief; Permanent establishment; Royalty expenses; Related party transaction
• Section: 143(3); 48; 208; 43; 22; 13; 92CA; 144C; 201(1); 10B; 92D; 92A; 20

Judgement Text

"आयकर अपीलीय अधिकरण ’डी’ न्यायपीठ, चेन्नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI श्री एबी टी. वर्की, न्याययर्क सदस्य एवं श्री अमिताभ शुक्ला, लेखा सदस्य क े समक्ष BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./ITA Nos.669/Chny/2017 निर्धारण वर्ा /Assessment Years: 2012-13 Ford India Private Limited, S.P. Koil Post, Maraimalai Nagar, Chengalpattu, Tamil Nadu-603 204. [PAN: AAACM4454H] Deputy Commissioner of Income Tax, Large Taxpayer Unit-1, Chennai (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Assessee by : Shri Ajit Kumar Jain, CA प्रत्यर्थी की ओर से /Revenue by : Ms. C.Vatchala, CIT सुनवाई की तारीख/Date of Hearing : 26.08.2024 घोषणा की तारीख /Date of Pronouncement : 22.11.2024 आदेश / O R D E R PER AMITABH SHUKLA, A.M : This appeal is filed against the order of Deputy Commissioner of Income Tax (herein after DCIT) for the assessment years 2012-13. Through the aforesaid appeal the assesse has challenged DCIT order u/s 143(3) r.w.s. 144C dated 31.01.2017 of the IT Act, 1961 passed by DCIT, Chennai. 2.0 Brief factual matrix is that the assesse company is engaged in the business of manufacturing of passenger cars and related accessories. Ford India Pvt Ltd (FIPL) is a subsidiary of Ford Motor ITA No.669/Chny/2017 :- 2 -: Company (FMC) USA. The company apart from engaged in manufacture and sale of automobiles in India also undertakes contract manufacture of passenger cars for export to overseas Ford Group of Companies, provides administrative and other ancillary services to overseas Ford Group of Companies as well as logistics and coordination services. Return of income declaring loss of Rs. 64,41,09,353/- was filed for AY- 2012-13 on 30.11.2012. Considering involvement of international transactions, the Ld. AO referred assesse’s case to the Ld. TPO for consideration of adjustments u/s 92CA. Vide his order in F No.F- 101/TPO-1/AY-2012-13 dated 29.01.2016, the Ld. TPO proposed an adjustment of Rs. 243,81,73,427/-. The assesse contested the matter before the DRP which finally approved transfer pricing adjustment of Rs.224,78,12,958/-. The Ld. AO after incorporating some corporate additions finally passed his order u/s 143(3) r.w.s. 144C on 31.01.2017. The appellant assesse has contested both transfer pricing additions proposed by TPO and confirmed by the DRP as well as corporate additions made by the Ld. AO. The appellant has raised following grounds of appeal:- 1. The order passed by the Deputy Commissioner of Income-tax, Large Taxpayer Unit-1(‘DCIT’ or ‘AO’) pursuant to the directions issued by the Dispute Resolution Panel (‘DRP’), under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (‘the Act’), is bad in law and on facts. ITA No.669/Chny/2017 :- 3 -: 2. The adjustments made in the order of the learned AO are contrary to law, facts and circumstances of the case and hence liable to be quashed. 3. The learned AO erred on facts and in circumstances of the case and in law by confirming the proposed addition of INR 245,10,86,154 [i.e. INR 224,78,12,958 being Transfer Pricing adjustment based on the provisions of Chapter X of the Act and INR 20,32,73,196 based on the other provisions of the Act] to the Appellant’s total income. Grounds in relation to Transfer pricing adjustment The Learned Transfer Pricing Officer (‘TPO’) and the Learned AO under the directions issued by the Dispute Resolution Panel: 4. Erred in law by upholding / confirming the action of the Ld. TPO, without satisfying the conditions prescribed under Section 92C(3) of the Act. 5. Erroneous Rejection of segmentation Adopted by the Appellant 5.1 Erred in law and on facts of the case in disregarding the segmentation maintained by the Appellant based on his own conjectures and surmises and without providing any cogent reasons or material on record to justify the rejection of the segmentation maintained by the Appellant. 5.2 Erred in law and on facts by combining the Appellant’s Contract Manufacturing (‘CM’) Segment (export sales) with the Unrelated Dealer Sales (‘UDS’) segment (domestic sales) without appreciating the fact that the two segments have substantial differences in the Function, Asset and Risk profile, thereby violating the provisions of Rule 10B(2) of the Income-tax Rules, 1962 (‘the Rules’). Erred in law and on facts of the case in disregarding the separate Indian benchmarking analysis undertaken for the CM segment being export sales and erred in rejecting the global benchmarking analysis undertaken for the UDS segment being domestic sales, provided in the Appellant's TP Documentation and erroneously aggregating both the segments. 5.3 Erred in rejecting the Appellant’s segmental approach based on mis-understanding of facts and erred in stating that the customers of the Appellant have to buy both vehicles and spares from the Appellant. The Ld. TPO and the DRP failed to appreciate the fact that the Appellant is not engaged in distribution of spares in the CM segment. ITA No.669/Chny/2017 :- 4 -: 5.4 Erred in law and on facts in not following the principles of rule of consistency when the Appellant’s segmental approach for benchmarking the international transactions in the CM and UDS segment in AY 2012-13 is similar to facts in AY 2009-10, AY 2010-11 and AY 2011-12 wherein, the Ld. TPO accepted the transfer pricing approach of the Appellant. 6. Erroneous rejection of Overseas Tested Party Approach 6.1 Erred in law and on facts by ignoring the Global Transfer Pricing Policy of the Appellant with respect to the related-party purchases made for its UDS segment, from its Associated Enterprises (“AEs”) wherein the AEs, being the less complex entities, were considered as tested party and remunerated on an arm’s length basis. 6.2 Erred in law and on facts in disregarding the Transfer Pricing study maintained by Appellant and rejecting the methodical benchmarking analysis adopted by the Appellant consistently on year on year basis, thereby violating the principles of Rule 10B(2)(d) of the Rules. 6.3 Erred on facts in stating that no evidence was provided for mark- up earned by the AEs and its arm’s length nature thereof in comparison to global comparable companies, without appreciating that the same has been provided in the TP Study along with the global benchmarking undertaken by the Appellant and statutory auditor’s certification of AEs’ margins with respect to transaction with the Appellant. 7. Erroneous Rejection of Alternate Indian Benchmarking Study provided by the Appellant 7.1 Without prejudice to the above grounds on the Appellant’s position on using a foreign tested party for the UDS segment, the Ld. TPO erred in law and in facts by rejecting the alternate benchmarking analysis submitted by the Appellant during the TP assessment proceedings for the UDS segment using net margins of other Indian passenger car manufacturing companies. 7.2 Erred in rejection of Indian passenger car manufacturing companies provided by the Appellant on the Ground of related party transactions without appreciating the fact that most players in the auto industry had related party transactions and hence a higher related party filter limit of 35% was to be applied. 7.3 Grossly erred in comparing the Appellant engaged in manufacturing of passenger cars against companies engaged in ITA No.669/Chny/2017 :- 5 -: manufacturing of commercial vehicles, trucks, buses, two- wheelers, etc. without appreciating that the market and product profile of these companies are significantly different as against the Appellant. 7.4 Erred in denying economic adjustment claimed by the Appellant with respect to difference in capacity utilization, customs duty adjustment and working capital adjustment. 7.5 Without prejudice to the above grounds, the Ld. TPO erred in computing the margin of FIPL by considering the Brand Development fees at INR 5,78,59,146 instead of INR 57,85,91,460. Further the Ld. TPO erred in not factoring the adjustment made on account of product development expenses while computing FIPL’s margin though the same has been factored in the preceding and succeeding years’ TP assessment proceedings. 8. Adjustment Towards Brand Development Fees 8.1 Erred in law and on facts of the case in considering Advertisement, Marketing and Promotion (‘AMP’) expenditure incurred by the Appellant wholly and exclusively for its domestic business operations, within the realm of international transactions and proposing an ad-hoc brand promotion fee of 1% of net sales, based on his own conjectures and surmises violating section 92(B) and section 92(1) of the Act. Erred in law and on facts by re-characterizing the Appellant as engaged in brand building service provider without appreciating that the Appellant is engaged in manufacture and sale of passenger cars and further erred in mis-interpreting the intercompany agreement based on his own assumptions, surmises and conjectures that the AEs have obligated the Appellant to incur AMP expenses and promote the ‘Ford’ brand. 8.2 Erred in rejecting the Appellant’s reliance on the Hon’ble Delhi High Court’s ruling in the case of M/s. Maruti Suzuki Limited without providing cogent reasons and without appreciating the facts of the case. 8.3 Erred in facts in alleging that the Appellant has offered services bearing the brand/trademark owned by the AE based purely on his conjectures and surmises, without considering the fact that there was no explicit or implicit arrangement/agreement to provide any brand promotion services to the AE. 8.4 Erred in proposing a brand fee adjustment at an arbitrary and hypothetical rate of 1% of sales based on unsubstantiated ITA No.669/Chny/2017 :- 6 -: presumptions, surmises, conjectures and allegations, violating section 92C(1) of the Act read with Rule 10B of the Rules. Further, disregarded the deletion of adjustment towards Brand Promotion as directed by the Hon’ble Chennai Tribunal in the Appellant’s own case. 8.5 Without prejudice to the above, the Ld. TPO grossly erred in extending the alleged brand building services and attributing 1% on the Appellant’s export sales as well, without appreciating the fact that the Appellant’s AMP expenditure were subject to the Indian territory. 9. Erroneous selection of comparable companies for Business Processing (‘BP’) Services segment 9.1 Erred in law and on facts in conducting a fresh benchmarking analysis using non-contemporaneous data and substituting the Appellant’s benchmarking analysis with fresh benchmarking analysis, cherry picking high margin companies, using high turnover companies based on his own conjectures and surmises and further erred by not providing the search process, filters applied, qualitative and quantitative analysis performed for selection of the comparables. 9.2 Without prejudice to the above grounds, the Ld. TPO erred in law and on facts in computing the operating margins of companies as identified by the Ld. TPO himself and in computation of transfer pricing adjustment 10. Product Development Expenses 10.1 Erred on facts and in law in considering product development expenditure, within the realm of international transactions based purely on his conjectures and surmises, violating section 92(B) and section 92(1) of the Act. 10.2 Erred in law and violated the principles of natural justice by disallowing the product development expenses without applying any of the methods prescribed in section 92C(1) of the Act read with Rule 10B of the Rules. 10.3 Erred on facts and in law in concluding that the legal ownership of the products developed by the Appellant remains with the AEs and hence the costs incurred by the Appellant towards product development have to be reimbursed by the AE, without appreciating that there was no significant intangibles created out of the Product Development expenses, and that the full economic beneficiary to such expenses was the Appellant. ITA No.669/Chny/2017 :- 7 -: Grounds in relation to additions other than transfer pricing adjustment The learned AO: 11. Advance from customers towards extended warranty 11.1 Erred on facts and circumstances of the case and in law by treating the net advances received from customers towards extended warranty amounting to INR 11,83,06,406 as income for the year without appreciating that the given receipt can be treated as income only when the Appellant can legally appropriate it in its own right to the exclusion of the customer. 11.2 Erred on facts and circumstances of the case and in law by not distinguishing the advance received from customers towards extended warranty and the amount received towards base warranty which had been embedded in the sales price of the passenger car. 12. Disallowance of foreign currency payments under section 40(a)(i) of the Act 12.1 Erred on facts and in law by treating the modification charges of INR 118,170 paid to Cinetic Filling, France as fees for technical services and disallowing the same under section 40(a)(i) of the Act. 12.2 Erred in law by denying the benefit of applying the Most Favored Nation clause under paragraph 7 of the protocol to the India- France DTAA, based on which the Appellant had applied the restricted scope of taxation contained in India’s Double Taxation Avoidance Agreement (‘DTAA’) with Portugal, which had come into force after 01 January 1990. 12.3 Erred on facts and in law by treating the fees paid to Deutsche Bank, Singapore amounting to INR 17,080,437 as fees for technical services and disallowing the same under section 40(a)(i) of the Act without appreciating that the services received from the given party had not been made available to the Appellant under India-Singapore DTAA. 12.4 Erred on facts and in law by treating the installation and commissioning charges paid to Auto Alliance Co. Ltd., Thailand amounting to INR 1,42,98,185 as fees for technical services and disallowing the same under section 40(a)(i) of the Act without appreciating the fact that the said charges constituted business ITA No.669/Chny/2017 :- 8 -: income in the hands of the non-resident and would not be taxable in India in the absence of a Permanent Establishment (‘PE’). 12.5 Erred on facts and circumstances of the case and in law in treating the installation and commissioning charges, paid to the following non-residents, as fees for technical services and disallowing the same under section 40(a)(i) of the Act 12.5.1 Erred in law and failed to appreciate that installation and commissioning was a part of the composite contract to purchase the imported machineries and the same did not qualify as Fees for technical services / Fees for included services under the respective Articles of the DTAA. 12.5.2 Without prejudice to the above ground, the learned AO failed to appreciate that the services had not been made available to the Appellant and consequently the charges paid would not qualify as Fees for technical services / Fees for included services are under the respective Articles of the DTAA. 12.6 Erred on facts and circumstances of the case and in law by treating the annual license fees paid to Systran Software Inc., USA amounting to INR 2,08,558 as royalty and disallowing the same under section 40(a)(i) of the Act. 12.6.1 Erred on facts and circumstances of the case and in law by failing to appreciate that the payment was made in relation to copyrighted article and the same was not taxable under the provisions of the India-US DTAA. 12.7 Erred on facts and circumstances of the case and in law by stating that expenses reimbursed to the following parties would be subject to tax deduction at source and consequently disallowing the same under section 40(a)(i) of the Act. S. No. Parties Country Amount (in INR) a) Ford Motor Company Limited Australia 1,00,81,008 b) Visteon Electronics Corporation USA 3,02,400 ITA No.669/Chny/2017 :- 9 -: 12.8 Erred on facts and circumstances of the case and in law by concluding that, in the absence of a Nil deduction certificate, the Appellant was obligated to withhold taxes on all the aforesaid payments. 13. Deduction claimed against previous year’s disallowance 13.1 Erred on facts and circumstances of the case and in law by failing to grant allowance of provision for expenses reversed during the year amounting to INR 3,63,12,391 without appreciating that the same was disallowed in AY 2011-12. 14. Set-off of brought forward losses 14.1 Erred on facts and in law by not setting off the brought forward unabsorbed depreciation of AY 1997-98 and AY 1998-99 against the assessed income of the given AY. 15. Initiation of Penalty Proceedings 15.1 Erred on facts and in law by initiating penalty proceedings on the ground that the Appellant has failed to furnish accurate particulars of income thus resulting in concealment of income. 16. Consequential Relief 16.1 The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra as also all consequential relief thereto. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal. S. No. Name of vendor Country Amount (in INR) a) Ford Corporate & Employee Insurance USA 2,27,754 b) Ford Group Philippines 10,56,462 c) Ford Motor Company USA 25,97,283 d) Ford Motor Company USA 26,84,142 ITA No.669/Chny/2017 :- 10 -: 3.0 Ground of appeal No.1 to 4 are general in nature and therefore do not require any specific adjudication. 4.0 The first issue raised by the assesse through ground of appeal no.5, 6 and 7 are regarding an addition of Rs.137,35,23,431/- made by the Ld. AO on the proposal of Ld. TPO. Thus, whereas ground of appeal No.5 is regarding rejection of segmentation adopted by the appellant, ground of appeal No.6 is regarding rejection AEs of assesse as tested parties and ground of appeal no.7 is an alternate ground regarding non- adoption of assesse’s comparable parties in view of ground of appeal no.6. As regards rejection of segmentation adopted by the assesse the Ld. Counsel for the assesse explained that amongst activities undertaken by it, includes domestic manufacturing and sale of cars known as unrelated dealer sales segment or UDS segment as well as contract manufacturing and assembly known as CM segments. It was submitted that the Ld. TPO has also rejected the overseas AEs as tested parties included by the assesse in its TP study and also erroneously included domestic entities which were devoid of any meritorious consideration. 4.1 We have heard the rival submissions in the light of material available on records. The principal controversy is that according to assesse the UDS and CM are two distinct segments and cannot be combined for any TP adjustments and further that its overseas AEs being ITA No.669/Chny/2017 :- 11 -: least complex are to be taken as its tested parties. Differing with the arguments taken by the assesse the Ld. TPO treated the UDS and CM as one composite segments and also proceeded to reject overseas AEs of assesse as tested parties and replace them with domestic entities to benchmark assesse international transactions. The Ld. TPO has considered the entire issue on page-16 to 27 of his report. For the purpose of clarity the relevant part of the order of the Ld. TPO are extracted hereunder:- “…..8. Reflection of the TP document of the assesse: The TP document submitted by the assessee majorly talks about the global transfer pricing approach of Ford Motor Company which is the parent company of FIPL. The international transactions of FIPL with its AEs were not given the adequate importance while preparing the documentation. In the segments like contract manufacturing and unrelated dealer segment, the document is short of financial data pertaining to the AEs which are treated as tested parties. Such a global approach without substantive evidences is not as per the Indian transfer pricing guidelines. 8.1. Under the TP provisions, the primary onus is on the tax payer to determine an ALP in accordance with the rules. The same should be substantiated with the prescribed documentation as per the provisions Section 92C(3). In the present case, the assessee has not fulfilled such criteria as the price charged in international transaction has not been determined in accordance with the sub-section 92D (1) and (2). Further, the information of data used in computation of ALP as discussed in the preceding paragraphs cannot be said to be reliable or correct. Hence, the TP documentation submitted by the assessee need to be rejected and the ALP need to be computed for the international transaction of the assessee with AE as per ne provisions of Section 92C(4). 9. TPO's conclusive remarks about the two segments viz, unrelated dealer segment and contract manufacturing considered by the assessee: It is noticed from the Annual Report submitted by the assessee for the FY 2011- 12 that the total sales/revenue from operations is at Rs.5845.78 crores, As already mentioned in the preceding paragraphs, unrelated dealer sales and contract manufacturing consist 98% of the total revenue of assessee company. In this regard, the following observations are made about the segmentation made by the ITA No.669/Chny/2017 :- 12 -: assesse in preparing the TP documentation and subsequent benchmarking analysis done in order to arrive at arm's length. 9.1 In the TP document, the assesse has considered different aspects of unrelated dealer segment by AEs and the markup shown by them. However, the assesse Could not prove how the markup earned by various AEs located in different countries is in arm's length when compared to the comparable companies globally. 9.2. During the TP proceedings, the assesse has been asked to submit the details of tested party in order to understand and appreciate the claim of assessee saying that the margins earned in the segment of unrelated dealer sales are in arm's length. The assessee has failed to substantiate the same. 9.3. In view of the above, the following observations are further made: 9.3.1. In its TP study, the assessee has admitted to benchmark its international transactions by carving out certain segments which are otherwise not there in the financials. Ford India is in agreement with Ford U.S, the parent company, for using its trade names, technology and technical assistance. For availing these services it is paying brand royalty and technical royalty to Ford U.S. and also product development expenses. (For these, it has executed respective agreements). All these expenses are in the context of the manufacturing carried out in India. These expenses are incurred by the Company as a whole, irrespective of the fact whether the vehicles manufactured are exported or sold within the country. The License Agreement of the trade name which authorizes the assessee to use the brand name of Ford is a general license to the assessee with no specified territory, implying that the assessee can use this brand name on its export also. However, despite there being total integration in the manufacturing activity carried out in the manufacturing plant in India and there being no segregation of export vehicle manufacturing and domestically sold vehicle manufacturing, the assesse has shown a separate segment of contract manufacturing wherein it has hived off the sale made to related parties. It is interesting to note that no expenses of royalty, license fee for trade name or product development expenses are debited to this segment only in order to have an inflated margin. On the sale figure side, the assessee has credited the entire sale of spares to its AEs and exported. The assessee has not shown sale of spares in domestic sale. However, it is noticed that in both the segments, the assessee is a full-fledged manufacturer of vehicles. It is taking all the risks and performing all the functions of a manufacturer and all assets are utilized for carrying out these manufacturing activities whereas contract manufacturing is only a partial responsibility and is performed in pursuance of a contract which, in the case of the assesse, is not there. The assessee has not been able to furnish any such contract executed with the AEs for carrying out such manufacturing activities. Another thing which is seminal to contract manufacturing is the manufacturer is given certain yearly projections and purchase orders. The contract manufacturer has an absolute order in place and does not take any inventory risk with respect to this manufacturing. However, in the present case of the assessee, there is no such overall order placed and it appears that the assessee is complying with its AEs on demand-basis, i.e, assessee undertakes the inventory risk as well. The assessee could not establish whether the models sold to AEs in the segment of contract manufacturer are different from the models sold domestically as shown in the segment of unrelated dealer sale. Therefore, the argument taken of being a contract manufacturer is not reliable and contract manufacturing is nothing but ITA No.669/Chny/2017 :- 13 -: an integral part of the manufacturing activity carried out at the manufacturing premises in India and has to be considered as one entire segment and benchmarked accordingly. 9.4. In view of the above observations of TPO, the two segments treated by the assessee separately (unrelated dealer segment and contract manufacturing) are to be treated as a single segment wherein the assessee company is undertaking manufacturing activity and sale of the finished cars. 9.5.1. Comparability Exercise undertaken by the TPO: To benchmark the international transactions of the assessee, this office has carried out an exercise to determine the comparable companies. The comparability of international transaction with an uncontrolled transaction is determined based on guidelines suggested by Rule 10B(2) which inter alia mentions that \"conditions prevailing in the market in which the respective parties to the transaction operate including the geographical location and size of the market, the laws and orders in force, the cost of labour and capital in the market, overall economic development and level of computation and whether the markets are wholesale or retail\" (Rule 10B(2)(d)]. This implies that while considering the selection of comparable companies of the assessee, the conditions prevailing in the Indian Automobile market and its concomitant features are to be taken into consideration. Similarly the rules provided in Rule 10D also referred in Rule 10D(1)(f) that the records pertaining to economic and market analysis are also to be taken into consideration. The FAR analysis of the assessee i.e. the analysis of functions performed, assets utilized and risks undertaken has already been undertaken in the preceding paras and hereafter the features of the Indian market conditions are being considered. 9.5.2. Salient features of automobile industry in India: The automotive industry in India is one of the largest automotive market in the world. In the recent past, India has emerged as the 6th largest automotive manufacturing industry in passenger and commercial vehicle sector by overtaking established countries like Brazil. Similarly, India has also emerged as Asia's 4th largest exporter of passenger cars after Japan, South Korea and Thailand. In the recent past, it has also become one of the key global markets (both for consumption and as production base) by becoming base for global manufacturers like Nissan, Renault, GM, Ford, Honda, Suzuki, Hyundai, Daimler, Skoda, Volkswagen, etc. Almost all the top global brands are present now in India and also have manufacturing and assembling units. 9.5.3. One of the common features of automobile manufacturers especially passenger cars in India is that they are having strong foreign company investment and strong technical collaboration of Indian companies with global companies. For example, one of the forerunners in this sector, Maruti Suzuki Industry Limited is a tie-up of Maruti with a Japan Company, Suzuki, Mahindra in tie-up with Renault, etc. Most of the Indian companies have also made joint ventures (JV) with foreign brands. Post globalization, the global giants like Hyundai Motors, Honda, Ford, Volkswagen, etc., have started manufacturing units in India. All these companies are depending on their global partners invariably for the technical inputs and innovative methods which are dynamic in the automobile industry. Most of the automobile companies have started exporting due to strong tie-up with their global partner. A common scenario of the sales by Indian companies is that exports to their global partners are forming a ITA No.669/Chny/2017 :- 14 -: significant portion of the revenue. This has been in uptrend as more manufacturing units have been setup in India. 9.5.4. The above feature of foreign collaboration and technical assistance is responsible for a substantial amount of related party transactions happening between the Indian automobile companies. 9.5.5. The Indian automotive industry has shown a significant growth during the FY 2011-12. The total production has increased by 13.83% when compared to the previous financial year. The growth rate for overall domestic sale for FY 2011-12, was at 12.24%. The growth in both domestic as well as export market in this industry has been on a positive note like rising income and GDP growth, strong local demand, establishing India as a global auto hub and strong product innovation. 9.5.6. Since the trend in the automobile sector is positive, therefore, the companies which are showing negative trend and negative results persistently are opposed to the normal trend of the industry and while selecting the comparables, are not to be considered as suitable comparables. 9.5.7. The above-mentioned significant features which are seminal to automobile industry are to be considered while identifying the suitable comparables. On the basis of the above, the following search was carried out which gave the following comparables:- i. Hyundai Motor India Ltd. ii. Mahindra & Mahindra Ltd. ii.Mahindra Vehicle Mfrs. Ltd. iv.Maruti Suzuki India Ltd. V.Tata Motors Ltd. 9.5.8. The assessee has objected to these comparables stating especially that they suffer from RPT. The above comparables and their PLI working has been supplied to the assessee. By rejecting the approach of assessee in selecting AE as the tested party, it has been asked to consider Indian entity. i.e.. FIPL as the tested party and submit the Comparables. In response to which, as an alternative submission, the assesse has replied as under:- \"Our alternative submission with respect to the Unrelated Dealer Sales segment asrequested by your qoodself: The Assesse firmly believes that for its Unrelated Dealer Sales segment, the tested party should be only Ford overseas Affiliate entities, and the FIPL cannot be the tested party for the international transactions in its Unrelated Dealer Sales segment as mentionedabove. Without prejudice to our above position, as requested by your goodself, we have conducted a search for Indian comparable companies in the Indian passenger car segment, as an alternative submission, as follows: a) Search process for comparable companies  FIPL'S unrelated sales segment covers manufacturing, marketing, sale and ITA No.669/Chny/2017 :- 15 -: service in relation to passenger cars and parts & components in the Indian market through a network of unrelated dealers throughout the country.  The search process and search results for Indian passenger car manufacturers are given in Annexure C. Kindly note that while selecting the Indian comparable companies, we have not excluded companies with significant related party transactions, as such a filter will result in rejection of almost all the available comparable companies.  We have selected four companies as comparable companies to FIPL. The margins earned by the four comparable companies given in table 2 below: Table 2: Net profit margin earned by comparable companies S.No. Particular FY 2011-12 - NPM 1. Honda Cars India Ltd. -25.56% 2. Hyundai Motor India Ltd. 4.42% 3. Maruti Suzuki India Ltd 4.42% 4. Hindustan Motors Ltd. -22.94% Arithmetic mean -9.91% 9.5.9. As discussed above, the automobile sector in India especially of passenger cars is affected by related party transaction because of technical collaborations, joint establishments. All the suitable comparables suffer from RPT and thus cannot be considered as suitable comparables. The assessee has objected to these comparables relying on numerous decisions from various appellate authorities and High Courts. Therefore, on the basis of the objections raised by the assessee and also compelled by the RPT prevalent in passenger car segment, the search carried out was broad-based to include all vehicles. It may be noted that the ALP is being determined using TNMM as the most appropriate method. In TNMM, the comparability is carried out based on the functional similarity. While doing the comparability under this method, we need not go into the verticals of the concerned industry which, in this case, is automobile industry. Therefore, constrained by the RPT infested comparables, the search is being done broad-based to carry out the comparability on the basis of the functions performed that is of manufacturing of vehicles. The assessee is also performing the function of manufacturing the vehicles and comparables are also performing the function of manufacturing of vehicles. The search carried out is given below: 9.5.10. Selection of comparables: Since the manufacturers of passenger car vehicles are fewer in number without related party transactions and to make the search broad based taking into account ITA No.669/Chny/2017 :- 16 -: the broad functional similarity the search was extended to cover manufacturers of commercial vehicles. The search process is as under: Databases used Prowess and CapitalinePlus, to identify potential uncontrolled comparables for transaction in the nature of Manufacture of Automobiles. Time Period: Only data relating to the current year was used. The following paragraphs provide the search strategy employed to identify comparable companies through the automated search on the databases: Basis of identification – Manufacture of automobiles. In considering the potential comparable companies we have considered companies, where ae included under the industry as “Automobiles” from the above databases. The companies operating in the following industries were selected for identifying the comparable companies. Capitaline plus Industry Industry classification – CMIE -Automobiles – Motor Cycles / Mopeds Automobile -Commercial Vehicles – Heavy Commercial -Automobiles – LCVs & HCVs Vehicle -Automobiles – Passenger Cars - Commercial Vehicles – Light Commercial Vehicle -Automobiles – Scooters & 3 wheelers - Passenger cars and jeeps – Passenger Cars -Automobiles – Tractors - Passenger cars and jeeps – Utility vehicle incl. Jeeps. - Two & Three wheelers – Two wheeler - Two & three wheelers – Three wheeler. - Automobile Ancilllaries. Industry Classification – NIC Manufactures of motors cars Manufacture of motor vehicles Manufacture of motor vehicles for the transport Manufacture of motorcycles (including mopeds) Manufacture of scooters manufacture of three- wheelers, manufacture of tractor, harvestors and other heavy Manufacture of motor vehicles, trailers and semi-trailers; Pre-Defined sets :CMIE Industry Automobile ITA No.669/Chny/2017 :- 17 -: -Commercial vehicles Capitaline Plus Prowess -Passenger cars and multi utility vehicles. -Two & three wheelers. -Other Transport equipement. Automobile Companies were eliminated for the following reasons:  The company data was unavailable in the public domain for the latest year  The company did not satisfy the quantitative screens;  The Company performed non-comparable functions;  The company's products and services were dissimilar;  The company was consistently loss-making or did not perform operational activities;  The company was engaged in significant cross-border related enterprise transactions exceeding 25%. 9.5.11. Due to the limited information provided by the business descriptions held on the databases and to obtain additional certainty on the operational information of the potentially comparable companies, additional research through the annual reports of the companies where available and also from internet was performed to supplement the published information in the databases. 9.5.12. List of five final selected companies 1. Ashok Leyland Ltd. 2. Eicher Motors Ltd. 3. Force Motors Ltd. 4. S ML Isuzu Ltd. 5. VE Commercial Vehicles Ltd. The list of comparable companies and their respective margins are given in the table below: ITA No.669/Chny/2017 :- 18 -: S.No. Company name Correct computation 1. Ashok Leland 7.04% 2 VE commercials 9.17% 3. Eicher Motors limited 10.05% 4. SML Isuzu 6.73% 5. Force Motors Limited 2.99% Mean(OP/OR) 7.19% Mean(OP/OC) 7.75% 9.6 PLI calculation of the assessee from the manufacturing segment: Company name Amount in Rupees Total sales* 5791,70,05,232 Total operating expenses 5903,06,40.381 Operating loss -111,36,35,149 PLI(OP/OR) (-)1.92%  The total sales is Rs.5785,91,46,086/-. As per the adjustment made, towards brand development fee, the assessee should get further income of 1% on the total sales which works out to Rs.5,78,59,146/- The details are explained in the latter portion of the order. 9.7 Accordingly, the ALP is calculated as under: ALP Calculation: Value of transaction with AE (cost of goods sold) = Rs.1399,30,52,651/- COGS related = Rs.1257,03,26,544/- ITA No.669/Chny/2017 :- 19 -: + Royalty expenses = Rs. 142,27,26,107 = Rs.1399,30,52,651 Operating loss shown by assesse =(-) Rs.117,14,94,295/- Margin of the assesse(OP/OR) =(-) 1.92% Arithmetic mean of margin of the comparable companies…..” 4.2 On the first question of need for combining UDS and CM segment the Ld. TPO observed that the assesse has arrived at a mark up at 6.39% from the UDS segment after making certain adjustments details of which with any supporting evidence were not provided. The need and necessity for these adjustments were also not clarified. The L.d TPO noted that segmental calculations alluded disproportionate allocation of expenses like labour service, depreciation etc. The AO held the view that existence of a valid contract is seminal to any contract manufacturing activity which was absent in assesse’s case. It was the case of the assesse before the Ld. TPO that it makes its sales to overseas entities on the basis of purchase orders only. The Ld. TPO argued that for any segmental allocation expenditure and revenue recognition should be separately done. The assesse had also failed to submit any data during the proceedings before the Ld. TPO in support of its own TP study. Before the Ld. TPO the assesse had mainly placed reliance on its TP ITA No.669/Chny/2017 :- 20 -: study in view of the global transfer pricing policy of Ford Group of Companies. 4.3 On the second question of treatment of overseas AEs as tested parties the Ld. TPO observed that for the purpose of benchmarking its international transaction at arm’s length the overseas AEs role as contract manufacturer and logistics coordination service provider qua transactions undertaken with assesse and margins therefrom were used. The Ld. TPO noted that the assesse was asked to submit basis for considering the functions of the AEs with supporting documents and that the impugned information was neither provided by the assesse nor was available in public domain. The Ld. TPO noted that the location of selected overseas AEs in divergent geographical locations having different industrial / market conditions and financial situations would influence transfer pricing parameters. In support of its contentions, the Ld. TPO relied upon various judicial pronouncements indicated in his TP report. 4.4 The Ld. TPO is of the view that despite being no segregation of manufacturing activity for exported vehicles and domestically sold vehicles, the assesse has shown a separate segment of CM wherein it has hived off the sale made to its related parties. He noted that no expenses pertaining to royalty, licence fee for trade name or product ITA No.669/Chny/2017 :- 21 -: development are allocated to the CM segment. The assesse was reported to have credited entire sale of spares to its overseas AEs and not shown any sale of spares in local market. The Ld. TPO noted that the assesse was taking all the risks and performing functions of manufacturer by utilizing all its assets. In the absence of any specific agreement and contracts between assesse’s and AEs to whom cars were sold the TPO drew a presumption that it was assesse which was taking all the inventory risks. In the absence of prior overall orders, the assesse was complying on demand basis and thus liable for all inventory risks. The assesse could not demonstrate with an evidence that there was any difference between the car models sold to AEs Vis a Vis car model sold domestically in the UDS segment. Consequently, the Ld. TPO concluded that the two segments are one composite segment. 4.5 The Ld. Counsel for the assesse submitted that the approach taken by the Ld. TPO is not based upon correct understanding facts of the case. It was urged that TPO has not properly understood and appreciated the facts of the case. The difference between UDS and CM segments as separate segments was attempted to be established by relying on aspects that assesse carries out manufacturing activities in CM segment based upon instructions and specifications received from the AEs as clients, all marketing activities are undertaken by AEs in their ITA No.669/Chny/2017 :- 22 -: respective regions in which assesse has no role to play, all after sales and support services is given by AEs only, it does not own any non- intangibles, all product liability risks are borne by AEs and all sales are supported by firm orders which adds to utilization of idle capacity of assesse’s manufacturing plants etc. On the issue of rejection of AEs as tested parties the Ld. Counsel submitted that the TPO erroneously benchmark transactions using Indian comparable. It was argued that once segmentation ground is accepted assesse become the least complex entity and therefore the tested party. It was also argued that for UDS segment, since the assesse is a complex entity the overseas entities perform least complex functions and hence tested parties. 4.6 In support of its contentions, the Ld. Counsel for the assesse placed reliance upon the decision of Hon’ble Madras High Court in the case of Virtusa consulting services pvt ltd (TCA No.996 of 2018 extracted herein below:- “….benchmarked the transactions using Indian comparables taking FIPL as the tested party. The Ld. AR argued that once segmentation around, as documented in the TP Study is accepted, in the CM segment, FIPL is the least complex entity, hence considered as tested party and compared against Indian Comparables. For UDS segment, since FIPL is the complex entity and the overseas affiliates perform least complex function, the overseas affiliates should be considered as tested party. 8. Reliance was placed on the Hon'ble Madras High Court decision in the case of Virtusa Consulting Services Private Limited (T.C.A.No.996 of 2018) given in Para 24, 25 & 29 in Pg 1117 of Paper Book Volume 3. The relevant extract from the Virtusa decision is provided below: \"24. The assessee ignored Nos. 6 to 8 before the Tribunal had contested the issue relating ITA No.669/Chny/2017 :- 23 -: to consideration of the foreign AE as tested party. The assessee has submitted evidences and documents relating to the assessee's transfer pricing documentation, global transfer pricing reports of the foreign AE at Unite Kingdom, Australia and German; extracts of inter-company service agreement, reconciliation of operating credits earned by the overseas subsidiaries, etc. So far as the risks assumed by the assessee, the same has been elaborately brought out in the TP documentation as could be seen from paragraph 4.03.3 under the sub heading Risks Assumed and paragraph 4.06 under the sub heading Associates Employed. This vital material has not been considered by the TPO but the assessee has been precluded from canvassing the said issue on the ground that the stand taken during the course of TP proceedings was not what was the subject matter of the TP documentation/TP study of the assessee. The question would be whether this could be the reason for rejecting the assessee's plea. This issue has been considered by the Tribunal in several decisions. 25. In Yamaha Motor Private Limited, the question arose as to whether the word 'Associated Enterprise' can be given a restrictive meaning to mean the other party to whom the assesee has sold or purchased goods. Ii was held that under the Act and the Rules, the words Enterprise' and ‘Associated Enterprise' have been used interchangeably and the arguments that the Enterprise will mean the assessee and the Associated Enterprise will mean the other party to whom the assessee has sold or purchased goods is incorrect. As could be seen from the definition of Enterprise given in section 92F(iii) and Associated Enterprise as defined in Section 92A of the Act, it is evidently clear that the statute does not indicate that 'Enterprise 'shall mean the assessee and the Associated Enterprise' will mean the other party. As pointed out earlier, the words 'Enterprise' and 'Associated Enterprise' have been used interchangeably. Therefore, the conclusion of the Tribunal in this regard is not sustainable. 29. The issue regarding the assessee's plea to consider foreign AE as tested party to determine the Arm's Length nature of the underlying international transaction stands remanded to the Transfer Pricing Officer for a fresh decision on merits and in accordance with law having due regard to the orders passed by the Transfer Pricing Officer in the assessee's own case for the subsequent assessment years…. \". 4.7 The Ld. Counsel also relied upon the decision of Hon’b le coordinate bench of Ahmadabad tribunal in the case of General Motors of India vide ITA No.3096 / Ahd / 2010 extracted herein below:- “…..9. Further the Ld. AR also placed reliance on the decision of Hon'ble Ahmedabad Tribunal in the case of General Motors India Pvt. Ltd vs DCIT - I.TA. Nos. ITA No.669/Chny/2017 :- 24 -: 3096/Ahd/2010 and 3308/AhdI2011 as given in Page 1139 of Paper Book Volume 3. The relevant extract is as follows: “11.5.1 The DRP in its findings at para 11 had stated, among others, that in most cases the tested party will be the least complex of the controlled tax payers, and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. As GMDAT is not only a complex entity owning valuable intangibles, the data for comparability of GMDAT or the comparable is also not available. 11.6 To sum up, it was the argument of the assessee that if stringent comparability analysis as adopted by the TPO were to be adopted, and then M&M should also be put to such a stringent comparability test. It was, further argued that M&M is also involved in the manufacture of multi utility vehicles, light commercial vehicles as well as three wheelers apart from passenger cars. It was, further, countered by the assessee if Force Motor Limited were to be rejected on the basis of different profit profile and then M&M should also be axed on the same logic. We find force in the above argument of the assessee. According to the assessee, GMDAT is only engaged in manufacturing and supply of certain components used in manufacturing of cars only. This has not been disputed by the revenue. 11.6.1 We are in disagreement with the revenue's argument that GMDAT should not be selected as a tested party' as the comparable as the comparable companies selected by the assessee doesn’t fall within the ambit of TPO's jurisdiction and, thus, he can neither call for any additional information nor Scrutinize their books of accounts. The Revenue can get all the relevant particulars around the globe by using the latest technology under its thumb or direct the assessee to furnish the same. 11.6.2 As rightly highlighted by the assessee, we find inconsistency in the approach of the TPO with regard to the issue of tested party. On the one hand, the TPO averred that there was no reliable data available for both GMDAT and comparables; however, on the other hand, he had conveniently taken GMDAT as the 'tested party' while making adjustment to transaction relating to payment of royalty by the assessee to GMDAT. This exposes the inconsistency approach of the TPO 11.6.3 The financial statements of comparable companies have since been audited by the independent auditors and, thus, there can be no reservation in placing a reliance on the same. 11.6.4 However, the learned Sr. Counsel submitted that segment financial data for benchmarking – a part of GMDATs business - was made available to the TPO and also on his request, the financial statements of GMDAT (at company level) was furnished to the TPO and the same is not disputed. Therefore, there should be no grievance on the part of the Revenue to say that no sufficient data was made available….” 4.8 The Ld. DR vehemently argued in favour of the orders of lower authorities. It was submitted that the action of the Ld. TPO duly ITA No.669/Chny/2017 :- 25 -: supported by the Ld.DRP is based upon correct understanding of the facts of the case and therefore does not require any interference. It was urged that in the absence of facts and circumstances enumerated by the Ld. TPO in his TP report the twin acts of combining of UDS and CM segments as one activity and rejection of overseas AEs as tested parties was a correct and justified decision and does not require any interference. 4.9 Upon consideration of the first question regarding the action of revenue in combining the UDS and CM sector as one integral activities for determination of ALP we find sufficient force in the arguments of lower authorities. Absence of separate manufacturing facilities, prior contracts for purchase of vehicles, disproportionate allocation of expenses etc goes on to allude that the arguments of the two being separate activities cannot be taken. On its part the assesse has not been able to convincingly place on records any evidences in support of its claims. Consequently, we are inclined to concur with the findings of the Ld. TPO duly supported by Ld. DRP. The order of Ld. DRP is therefore sustained. Accordingly, the ground of appeal No.5 raised by the assesse towards rejection of segmentation of UDS and CM segment is dismissed. ITA No.669/Chny/2017 :- 26 -: 4.10 As regards the second question of rejection of overseas AEs as tested parties we find that the decision of Ld. TPO is not based on sound foundation. Firstly he has not been able to place on record a specific illustrations and findings before rejecting overseas AEs as tested parties. The same is relatable to both non-supply of sufficient details, alluded by TPO himself, by the assesse during its TP study as well as failure of Ld. TPO to do his own independent enquiries on the matter. Secondly, we have also noted that the comparables chosen by the Ld. TPO do not squarely fit into the line of arguments taken by him. To illustrate truck manufacturing company’s cannot be compared with a company primarily manufacturing passenger cars. It is trite law that in a TP study only likes are to be compared and apple and orange cannot be equated as one for any comparison. We have also examined the decision of Hon’ble Madras High Court in the case of Virtusa consulting Supra wherein the Hon’ble High Court held that overseas AEs can be treated as tested parties. However, it has been noted that in the said case the Hon’ble High Court had remanded the matter to TPO with directions to undertake a fresh decision on merits and in accordance with law after considering the details and documents of assesse’s own transfer pricing documents, global transfer pricing report of foreign AEs, extracts of inter-company agreements etc. In respectful compliance to the order of Hon’ble ITA No.669/Chny/2017 :- 27 -: jurisdictional High Court the orders passed by lower authorities on this issue of rejection of overseas AEs and adoption of domestic parties is set aside. The Ld. TPO is directed to reajudicate the matter afresh on merits and in accordance with law after obtaining all necessary details required for his TP study, and after giving due opportunities of being heard to the assesse. The Ld. TPO shall pass a speaking order on the subject. The assesse is directed to comply with all the notices issued by the revenue on this subject matter. Accordingly, the ground of appeal no.6 raised by the assesse qua rejection of overseas AEs is allowed for statistical purposes only. 4.11 The ground of appeal No.7 raised by the assesse towards erroneous rejection of alternate Indian benchmarking study provided by it, in view of the decisions and directions in appeal Nos. 5 & 6 above, has become academic in nature and bereft of any adjudication and hence dismissed. 5.0 The next issue raised by the assesse through ground of appeal no.8 is regarding upward adjustments towards brand development fees done by the Ld. TPO amounting to Rs.57,85,91,460/-. The Ld. AO accepted the impugned recommendation of the Ld. TPO and made addition of even amount. The Ld. Counsel for the assesse explained that the issue has been discussed by the Ld. TPO from pages 33 to 61 of his ITA No.669/Chny/2017 :- 28 -: order. The Ld. TPO noted that assesse has promoted and strived for development of brand “Ford” which is owned by the parent company. The Ld. Counsel argued that, in brief, the Ld. TPO held the view that some benefits are occurring to the parent company through above expenses and which should be reimbursed to the assesse. Consequently, the Ld. TPO suggested an addition of 1% of the total sales of the company as amount receivable from the parent company. Accordingly he had proposed an upward adjustment of Rs.57,85,91,460/- . The DRP through its order dated 23.12.2016 confirmed the above findings of the Ld. TPO. While doing so, the DRP distinguished the case laws relied upon the assesse. Before us the Ld. Counsel for the assesse vehemently argued that there is no case for making any upward adjustments qua these expenses in its hands. In support of its contentions the Ld. AR relied upon the decisions of Hon’ble Delhi Special Bench in the case of LG Electronics Pvt Ltd (14 ITD 41, of Hon’ble Delhi High Court in the case of Sony Ericson Mobile Communications India Pvt Ltd (374 ITR 118 and in the case of Maruti Suzuki India Ltd Vs CIT 282 CTR1, of Hon’ble Chennai Tribunal in assesse’s own case for 2007-08 and in the case of Nippon paints pvt ltd (ITA 779 / Mds / 2016, Hyundai India Motors Pvt Ltd (ITA 739 / 2014 and others) etc. It was argued that all the judgements majorly center on the argument that AMP expenses ITA No.669/Chny/2017 :- 29 -: are not International Transactions save cases where a specific contractual agreement binds Indian tax payer to incur an expenditure. The Ld. DR vehemently opposed the arguments put forth by the Ld. Counsel for the assesse and relied upon a catena of cases in support of order of lower authorities. It was contended that agreements have been entered by the assesse. The Ld. Counsel for the assesse argued that the agreements entered by the assesse do not obliges him to incur an expenditure for the benefit of AEs and that they were for different purposes. 5.1 We have heard the rival submissions in the light of material available on records. We find sufficient force in the argument of the Ld. Counsel for the assesse that AMP expenses would not constitute International Transactions save in cases where a specific contractual agreement binds it to incur an expenditure. We have also noted that the Ld. TPO while recommending an upward adjustment in para 11.3.22 on page 58 of his TPO report, observes that the issue has been decided in favour of the assesse for 2007-08 however since the department has not accepted the decision and is in appeal before the Hon’ble Madras High Court and therefore he is making the impugned upward adjustment. The argument given by the Ld. TPO is not acceptable in view of the principles of judicial discipline. An order of a superior appellate authority is to be ITA No.669/Chny/2017 :- 30 -: mandatorily followed by a lower authority until the same is overruled by the next higher appellate authority, in this case being Hon’ble Madras High Court. Thus to this extent the conduct of Ld TPO has been found to be totally unacceptable. Coming to reliance on judicial decisions relied upon by the assesse we have noted that in the case of Hyundai Motors Hon’ble Coordinate Bench of this Tribunal in ITA No.853 /Chny/2014 and in the case of Nippon paint India Pvt Ltd in ITA No.779/Mds/2016 has reversed findings of the Ld TPO and deleted additions made therein. 5.2 We have also noted that the Hon’ble Coordinate Bench of this tribunal in assesse’s own case for 2007-08 in ITA No.2089/Mds/2011 observed as under:- “…….33. We have carefully perused the orders and heard the rival submissions. The questions that are to be answered by us, based on the grounds raised by the assessee and facts assimilated above, can be identified as under:- (1) Is there any international transaction coming within purview of Chapter X of the Act by way of brand development done in India for FMC? Are there any distinguishing features here, which would rule out application of Special Bench decision in L.G. Electronics India Pvt. Ltd. (supra), in deciding whether there was any international transaction in the nature of brand development? (2) Can TPO take suo motu cognizance of a transaction for ALP adjustments though it has not been referred to him by the Assessing Officer? (3) If indeed there was any international transaction, whether ALP of such transaction can be fixed by using Bright Line Test (BLT) method? Are there two elements comprising in the valuation of a brand to the extent it was promoted by assesse in India, namely, marketing intangible in the nature of development of brand/logo of M/s Ford, in the form of add-on value on normal selling and marketing intangible created by higher than normal AMP expenses? (4) Is use of BLT for finding the comparable AMP expenditure a method allowed under Section 92C(1) of Rule 10B? (5) Is it required to exclude selling expenses from AMP, while making a comparable study? (6) Are the comparable candidate-companies selected by TPO appropriate ones or those selected by the assessee had to be considered as appropriate? ITA No.669/Chny/2017 :- 31 -: (7) Can the decision of Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) have any applicability, in view of the Hon’ble Supreme Court’s direction to TPO in the said case? (8) Is the disallowances of ` 14.8 Crores incurred by the assesse on product development justified? 34. We are making a sincere effort to answer each of the questions raised above, and through this resolve the disputes between the parties. 35. First, question is whether there was any international transaction coming within purview of Chapter X of the Act and whether assessee’s case is distinguishable on facts with that in the case of L.G. Electronics Pvt. Ltd. (supra) decided by the Special Bench. Contention of the Revenue is that this stands answered by the decision of Special Bench in the case of L.G. Electronics Pvt. Ltd. (supra). On the other hand, contention of the assessee is that in LG’s case, there were some special features in the agreement entered by LG Korea with LG India, which were not available in assessee’s case. As per the assessee, LG India was obliged to sell only LG products in India, whereas, there was no such exclusivity clause for the assessee. In our opinion, assessee was bound by the technical collaboration agreement dated 19th August, 1996 entered with M/s FMC. By virtue of such agreement, assessee had to sell products licensed by FMC with the badge “Ford” in India. Two lines of arguments has been taken by the assessee. One is that it was not promoting the brand name “Ford” by itself, in any of the advertisements, but was on the other hand, promoting various models of its cars. Second is that assessee had not indulged in any independent promotion of “Ford” brand in India. 36. We have looked at the two agreements entered by the assessee with M/s FMC, one of which is titled as “Technical Collaboration Agreement” which is dated 19th August, 1996, whereas, the second one titled as “Name License Agreement” dated 1st February, 1999. The former agreement, where assessee is a licensee, gave it a right and license to use technical information and industrial rights in connection with licensed products, namely, cars. It is specified in clause 1.9 of the said agreement that motor vehicles, which were the licensed products, meant finished vehicles manufactured by licensee and badged with Ford trademark. No doubt, there is nothing in the said technical agreement, which precluded the assessee from manufacturing and selling any other motor vehicles other than those of FMC or those manufactured using the technical information provided by FMC. Consideration to be paid by the assessee for such technical assistance is given at para 10.1 of the agreement, which is reproduced hereunder:- “10.1.1 In consideration of the grant of license and Technical Information and assistance provided by Licensor to Licensee inconnection with the manufacture of Licensed Products. Lincensee shall pay to Ford Motor Company, Ltd., UK in terms of the Letters of Approval of royalty at five (5%) percent calculated on the basis of the net ex-factory sale price as stated in Licensee’s invoice for all Licensed Products produced by or for Licensee, exclusive of excise duties, minus the cost of standard bought-out components and the landed cost of imported components, including ocean freight, insurance, and customs duties. For purposes of this calculation, standard bought out components means all items of machinery, equipment or components which are vendor items and which are not exclusively deigned or manufactured for use in the project or product. The aforesaid royalty shall be paid for each model of the Motor Vehicles, as defined in Section 1.9 during the period of the Agreement ITA No.669/Chny/2017 :- 32 -: as defined in Section 13.1.”Thus, assessee had to pay a royalty of 5% on sale price of all licensed products. 37. Now coming to the second agreement, which is “Name License Agreement”, what has been bestowed on the assessee through this agreement, is only a license to use the word “Ford” as its corporate name. Except for the license to use “Ford” as part of its corporate name, there is nothing in this agreement which enabled the assesse to use the word “Ford” in any of the products manufactured or marketed by it. 38. The litmus test for deciding whether an international transaction can be discerned out of an arrangement through which an assessee in India was manufacturing and marketing products branded with the name of a foreign enterprise, when they were related parties, had indeed come up before the Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra). There also the main argument taken by the concerned assessee was that there was no marketing intangible in the nature of brand building for LG in India, which could be construed as an international transaction. After going through the definition of “transaction” given under Section 92F(v) of the Act, Special Bench felt that there was no need for Legislature to define the word “transaction”, if mutual agreements between parties were alone to be considered. Even when there was no such formal agreement, there could be still an informal or oral understanding, which could be inferred from attending facts and circumstances. Special Bench held that conduct of the parties would show whether there was any tacit understanding of this nature. Here assessee admittedly had advertised its various brands of cars, but each brand started with the logo of “Ford”. It sold cars called Ford Fugo, Ford Escort, Ford Classic, Ford Fiesta, etc. Thus “Ford” is a common factor that appear in all class of cars sold by them. Para 9.10 of the order in the case of L.G. Electronics India Pvt. Ltd. (supra) is very relevant and reproduced hereunder:- “9.10 We do not find any force in the contention of the ld. DR that the mere fact of the assessee having spent proportionately higher amount on advertisement in comparison with similarly placed independent entities be considered as conclusive to infer that some part of the advertisement expenses were incurred towards brand promotion for the foreign AE. Every businessman knows his interest best. It is for the assessee to decide that how much is to be incurred to carry on his business smoothly. There can be no impediment on the power of the assessee to spend as much as he likes on advertisement. The fact that the assessee has spent proportionately more on advertisement can, at best be a cause of doubt for the A.O. to trigger examination and satisfy himself that no benefit etc. in the shape of brand building has been provided to the foreign AE. There can be no scope for inferring any brand building without there being any advertisement for the brand or logo of the foreign AE, either separately or with the products and name of the assessee. The A.O./TPO can satisfy himself by verifying if the advertisement expenses are confined to advertising the products to be so sold in India along with the assessee’s own name. If it is so, the matter ends. The A.O. will have to allow deduction for the entire AMP expenses whether or not these are proportionately higher. But if it is found that apart from advertising the products and the assessee’s name, it has also simultaneously or independently advertised the brand or logo of the foreign AE, then the initial doubt gets converted into a direct inference about some tacit understanding between the assessee and the foreign AE on this score. As in the case of an express agreement, the incurring of AMP ITA No.669/Chny/2017 :- 33 -: expenses for brand building draws strength from such express agreement; in the like manner, the incurring of proportionately more AMP expenses coupled with the advertisement of brand or logo of the foreign AE, gives strength to the inference of some informal or implied agreement in this regard.” 39. As mentioned by us, here the assessee had simultaneously advertised the logo “Ford” along with the model name of its own cars. May be it is true that assessee was not legally constrained to manufacture only cars for which technical knowhow was made available by M/s FMC and it had freedom to do independent manufacturing of cars as well. No doubt, the technical agreement dated 19th August, 1996, mentioned above by us, does not say in so many words that assessee was to exclusively manufacture cars which carried the logo “Ford” and use only the technical knowledge made available to it by FMC. In our opinion, such contrived situations cannot and should not blind one to the ground realities. Admittedly assessee was a 100% owned subsidiary of FMC. On a query raised by the Bench, learned A.R. did admit that its directors were appointed by FMC only. In such a scenario, to say that assessee could manufacture cars other than those branded as “Ford”, in our opinion, will be hard to digest. At the best this was only a remote possibility, and in the nature of agreement entered by the assessee with M/s FMC, never contemplated by both the parties and would probably never to materialize. That the assessee is not a simple contract manufacturer but, had 90% of its revenue generation from sale of cars, is not disputed. All the cars sold by it had the logo “Ford” along with particular nomenclature given to the model. Therefore, in our opinion, there can be a direct inference about a tacit understanding between assessee and FMC that the logo of “Ford” had to appear on every car manufactured by it. 40. On every advertisement placed by the assessee, it had to give the name of the car model with the logo “Ford” prefixed. Even a corporate advertisement placed by the assessee will have the name of “Ford” specifically mentioned since, its name itself consisted the logo “Ford”. Thus assessee had made a simultaneous promotion of cars and “Ford” logo. Learned A.R. was not able to point out even a single advertisement which would show a marketing effort of a product manufactured by the assessee in which “Ford” logo was not there. 41. When the control over the assessee was totally exercised by the parent company M/s FMC, it cannot, in our opinion, at the same breath, say that the AMP expenses incurred were not according to the plan and strategy of FMC. In the transfer pricing documentation submitted by the assessee to TPO (paper-book page 247) it is mentioned as under:- “Development of the brand has been steered by Ford Head Office in US through continuous product development, provision of direction on market strategy / expansion and definition of common practices, quality and security standards across countries.” When seen along with the total ownership and control exercised by FMC over the assessee, it can be clearly inferred that AMP expenses incurred were based on a corporate plan of FMC and not through any independent decision taken by the assessee in India, without the inputs and direction of M/s FMC. This also, in our opinion, clearly implies that there was a transaction between assessee and FMC for promotion of the brand “Ford” in India. 42. We do appreciate the submission of learned A.R. that Mr. Henry Ford had manufactured the first car and “Ford” as a brand was developed over hundred years and had a substantial value even prior to their entry in India. But this cannot ITA No.669/Chny/2017 :- 34 -: be so interpreted to mean that every Indian knew “Ford” before assessee sold the cars in India. Ford might have been known among middle class and upper middle class strata, but, without doubt, there would be a substantial number of persons in India, who would have become aware about the brand “Ford” through the advertisements placed by the assessee and its marketing efforts in India. A compilation and analysis of assessee’s market share vis-à-vis its major competitors, done by us, based on I.T.42 A. No. 2089/Mds/11 the data given by the assessee in its written submission, reveals interesting results:- Comparative sales chart (Rs. In Crores Financial year Maruti Suzuki India Hyundai Motor India Mahindra & Mahindra Ltd Toal Ford India Pvt Ltd (assessee) % of sale of assessee to total 2006-07 17458 10354 11238 39050 2192 5.61 2007-08 21221 12215 13015 46451 2032 4.37 2008-09 24334 17869 14668 56871 1702 2.99 Assessee has itself admitted its market share for relevant previous year as 1.9% only. Therefore, its claim that it had a head-start over others by using the “Ford” logo appears to be on a weak footing. 43. Even if we presume there indeed was any such advantage in the initial stage, after a particular point of time, it had to penetrate the market and reach people, who were not acquainted with “Ford” brand, and this indeed required marketing efforts. So, the piggybacking concept, strongly argued by the learned A.R., could at the best have been an initial phenomena. Even if we accept the contention of learned A.R. that advantage was derived by the assessee by piggybacking on the “Ford” logo, for achieving a head start over its competitors, in our opinion, this would have been short lived, which got obliterated after first few years of its existence. Admittedly, assessee had started its commercial operation as early as 1999. Therefore, in our opinion, any initial advantage assessee had, by using the name of “Ford”, even if we presume there was any, would have translated itself into sales in the few initial years, but, later on, assessee had to stand on its own feet to get a foot hold in the class of markets in India, where “Ford” name would not have had much relevance. At least for this class of market, there was indeed a brand building of “Ford” logo when assessee sold cars, which carried such logo. When FMC fixed the royalty payable by the assessee on sale of cars at 5%, they would have definitely considered the advantage they would eventually derive from their brand promotion done by the assessee in India. 44. Agreement between assessee and FMC, as already mentioned by us, was not exclusive, in that it did not preclude either party from going solo or having other arrangements. There was a remote possibility of FMC giving the knowhow to any other company or person in India and they could also market products carrying “Ford” logo through any other person in India. Had it done so, can we say that there was no intangible benefit derived by it, by virtue of the earlier AMP expenses incurred by the assessee which promoted the “Ford” logo? The answer is obviously “No”. Thus, there was an international transaction for creating and ITA No.669/Chny/2017 :- 35 -: improving the marketing intangible comprised in the logo “Ford” by the assessee for and on behalf of FMC. FMC was a non-resident and such transaction was of the nature of “provision of service” as held by Special Bench in the case of L.G. Electronic’s case (supra). In the facts and circumstances of the case, we cannot, therefore, fault the revenue authorities for treating the transaction of brand building as an international transaction. We do not find anything substantial or material enough to depart from the view taken by the Special Bench in this regard. Thus both legs of the first question are answered in favour of Revenue. 45. Coming to the next question which is whether TPO can take suo motu cognizance of a transaction for ALP analysis, in our opinion this also stands answered by Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra). Admittedly, assessee had not reported the brand promotion exercise as an international transaction as required under Section 92E. Once there was no reporting of an international transaction by the assessee, as held by the Special Bench, it was well within the power of the TPO to consider such transaction also, whether or not it was referred by Assessing Officer to him, under sub-section (1) of Section 92CA. Obviously such transaction can come to the notice of TPO only during the proceedings before him. In any case, by virtue of addition of clause (2B) to Section 92CA by Finance Act, 2012 with retrospective effect from First June, 2002, power of TPO in this regard has been clarified. Hence this question also stands answered in favour of the Revenue. 46. The next question that we have to answer is whether there can be two separate elements comprised in the promotion of the brand for which separate valuation has to be done, as advocated by the Revenue. Assessing Officer had made two additions for the brand building exercise carried out by the assessee in India. First was the addition of 1% of the sales and the second was the addition of excess AMP expenditure incurred by the assessee over the arithmetic mean of similar expenses incurred by three candidate companies selected by the TPO. In our opinion, TPO held that assessee’s holding company, namely, FMC, should compensate the assessee for building brand name and logo in India in two aspects. First one for enhancing brand value through sale of vehicles done by the assessee. Terming it as ‘market promotion fee’ or as a type of royalty due to the assessee, TPO applied 1% on total sales of ` 21,91,79,12,184/- which came to ` 21,91,79,122/-. The percentage was derived from royalty rates as per agreements entered by different type of companies, compiled from certain websites, which rate varied from 1 to 15% in the automobile sector. As per the TPO, 1% being at the bottom of the band, could be conservatively applied for fixing the market promotion fee for the brand “Ford”. For valuing the second aspect, TPO worked out the advertisement, marketing, publicity (AMP) expenses, which he considered excessive when compared to similar expenses incurred by similarly placed companies not doing any brand building for an Associate Enterprise. As per the TPO, the average AMP expenses incurred by three such candidate companies, namely, Tata Motors Ltd., Mahindra & Mahindra Ltd. and Hindustan Motors Ltd., came to 2.58% of sales against which assessee had incurred AMP expenses of 5.75% of sales. Therefore, as per TPO, there was excess expenditure of 3.17% on sales for AMP, and that was incurred for and on behalf of M/s FMC for promoting the “Ford” brand in India. In other words, as per the TPO, such excess amount was incurred by the assessee for and on behalf of M/s FMC, and it would not have normally incurred such excess if it was developing its own brand in India. Applying ITA No.669/Chny/2017 :- 36 -: 3.17% on the sales of the assessee, she arrived such excess AMP at ` 69,47,97,400/-. In other words, the marketing intangible in the nature of brand promotion of M/s FMC done by the assessee was fixed at ` 91,39,76,522/-. 47. Written submission given by the Department before us and the arguments of the learned D.R. does show that Revenue is confused with regard to the demarcating lines of the two elements which made up the value of “Ford” brand development in India. Argument of the Revenue is that low profits of the assessee was due to lower margins fixed on the prices of cars sold by it and this was done under the direction of FMC, since FMC was in lieu getting a benefit by way of additional marketing intangible in the nature of brand building. As per the Revenue, the brand building exercise gave a future value to the brand which would accrue to the parent company, namely, FMC. This concept of add-on brand value on normal sales and add-on brand value on additional sales, brought out by the Revenue to justify two additions, is, in our opinion, hazy and not supported by any empirical data. Its argument that assessee had reduced the prices and increased the AMP expenditure so that its parent company derived marketing intangible in the nature of brand development in India, is not backed by any empirical data. These are mere surmises. Unless Revenue is able to show that the normal sales if normal AMP expenditure alone was incurred would have been ‘x’ and additional sales on account of excess AMP expenses was ‘y’, it cannot say that there was a separate brand building arising out of normal sales and arising out of additional sales. Sales of the assessee for various years would show that they had only an insignificant share of total car sales in India, and much less than many of their competitors. In such circumstances, according to us, no rational inference can be drawn as to any normal sale and additional sales. If it could be shown that assessee had incurred AMP expenditure, over and above what were incurred by similarly placed other companies having no AE dealing, then in our opinion, an addition could be made for such excess expenditure considering it as brand development fee. Assessing Officer here applied 1% on the total sales, as royalty or brand development fee and in addition considered 3.17% of sales as excess AMP spendings again on brand building cost. We do find considerable strength in the argument of the learned A.R. that royalty rates worked out by the TPO, based on data available on the websites of Royaltysource, Royaltystat, Knowledge Express, ktMINE Royalty Rate Finder, etc., were royalty payable by a party who was using the logo or brand to the owner of the logo/brand and not vice versa. Here, admittedly, FMC was not charging any royalty on the assessee for use of its logo on the cars. Therefore, in our opinion, the artificial split attempted by the lower authorities on the marketing intangible in the nature of brand building was unwarranted and not based on any objective criteria. 48. In our opinion, the only objective criteria that could be applied is the excess AMP expenditure incurred by the assessee when compared to its competitors not having a foreign brand or logo. Special Bench in the case of L.G. Electronics India Pvt. Ltd. (supra) had clearly held that Bright Line test was nothing but a method falling within the scheme of Section 92C, since what was determined by applying such test was only cost/ value of international transaction. Bright Line is only the line drawn within an overall amount of AMP expenditure. The amount on one side of Bright Line, was the amount on AMP expenditure incurred on normal business of the assessee, whereas the balance amount represented expenses incurred for ITA No.669/Chny/2017 :- 37 -: and on behalf of FMC for creating and maintaining its marketing intangible which was the “Ford” logo. When both expenses were inter-built, some mechanism needs to be devised for ascertaining the cost of international transaction. Assessee here had not declared any cost/value for the international transaction comprising of brand building and therefore, it became imperative for the TPO to apply Bright Line test for determining such value. TPO had identified three comparable cases and ascertained the amount of advertisement, marketing and promotion expenses incurred by them as a percentage of their sales, and applied it to the turnover of the assessee. The excess of total AMP expenses over such amount does give a measure of the brand promotion expenditure incurred by the assessee for FMC. Thus, we have to hold that only addition that could be made was by considering the excess AMP spends, and the addition done by the lower authorities considering 1% of sales, as brand development fee was not justified. In our opinion, there was indeed a duplication in measuring the brand development fee for working out the ALP. What could have been considered was only the excess AMP expenditure incurred over and above the average of such expenditure as a percentage of sales of comparable entities. The question is answered in favour of assessee….” Further in the case of Hyundai Motor India Ltd ITA No.853 / Chny / 2014 for AY-2009-10 it was held that “……42. In the present case, however, since no services are performed, the discussion about benefit of the services is a academic. We have referred to the above discussions in the OECD Guidelines just to highlight the fact that even in situations in which benefit test is specifically set out in the definition of international transaction, the determination of arm’s length price of a service has two components-first, of rendition of service; and – second, of benefit accruing from such services. When the first condition is not satisfied, as in the present case, the matter rests there, and there is no question of benchmarking the benefit in isolation. In our considered view, an incidental benefit accruing to an AE, therefore, cannot be benchmarked unless it is result of a specific service by the assesse. 43. That takes us to last component of definition of “international transaction’ under section 92B. This refers to a transaction in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises. An accretion in the brand valuation of a brand owned by the AE does not result in profit, losses, income or assets of the assessee company, and it cannot, therefore, result in an international transaction qua the assesse. Unless the transaction is such that it affects profits, losses, income or assets of both the enterprises, it cannot be an international transaction between these two enterprises. If the assets of one of the enterprises are increased unilaterally, without any active contribution thereto by the other enterprise, such an impact on assets cannot, in our himble understanding, amount to an international transaction. The accretion in brand value of the AE’s brand name is not on account of costs incurred by the assesse, or even by its conscious efforts, and it does not result in impact on income, expenditure, losses or assets of the assesse ITA No.669/Chny/2017 :- 38 -: company. It is not, therefore, covered by the residuary component of definition of ‘international transaction’ either. 44. As for the emphasis placed by the Ld. Departmental Representative, as also by the authorities below, on the exhaustive definition of ‘intangibles’ in Explanation to section 92B, we may only reiterate that this definition would have been relevant only in the event of there being any transaction in the nature of sale, purchase of lese of intangible assets but then, it is not even the case of the revenue, that there was any sale, purchase or lease of intangibles. In view of these discussions, as also bearing in mind entirely of the case, we are of the considered view that the accretion of brand value, as a result of use of the brand name of foreign AE under the technology use agreement – which has been accepted to be an arrangement at an arm’s length price, does not result in a separate international transaction to be benchmarked. The impugned ALP adjustments of Rs.54,15,28,903, Rs. 62,20,34,587 and Rs.253,44,00,000, for the assessment years 2009-10, 2010-11 and 2011-12 respectively, must, therefore, stand deleted. We hold so. Grievance of the assesse, with respect to ALP adjustments on account of accretion in brand value of the AE due to its use by the assesse, is thus upheld. 45. So far as the assessment year 2009-10 is concerned, ground no.2 in the appeal filed by the assesse pertain to the above transfer pricing controversy. Ground No.2 is thus allowed” “…….. Again in the case of Nippon Paint India Ltd ITA No.779 / Mds / 2016 for AY-2011-12 it was held that Nippon Paint India Pvt Ltd Vs ACIT in ITA 779/Mds/2016 for AY-2011-12: 2.15 From the above discussion, it is clear that the TP regulations would be applicable to any transaction which is held to be an international transaction. In the instant case, the AO has referred the international transaction in the case of purchase of raw materials, finished goods, purchase of goods, purchase of solftware management consultancy reimbursement for TP Study and to determine the ALP. During the TP proceedings, the TPO found that there was a huge AMP spent and brought it under the purview of international transaction. The AMP spent was not obligated by AE. The expenditure was incurred by the asessee as sales promotion expenses for the purpose of it’s own cause. According to the assesse, there was no binding agreement to promote the brand of Nippon India by the assessee. The revenue could not demonstrate that there was an agreement or arrangement or action of concert formal or informal to promote the brand of Nippon in India and to spend towards AMP. The revenue has not proved that the benefits of AMP expenses are for improving the Nippon brand in India who is the economic owner of Nippon Japan. Therefore, we hold that the AO/TPO/DRP is not correct in making upward adjustment of brand promotion expenses and the mark-up on brand promotion. The case of assessee is squarely covered by the decision of Maruti Suzuki India Ltd., Vs DCIT 381 ITR 117 cited supra. 2.16 Respectfully following the judicial pronouncements discussed above, we hold that the AMP spent of the assesse is not an international transaction and the addition is deleted and ground nos. 2.1 to 2.8 of the assesse are allowed…..” ITA No.669/Chny/2017 :- 39 -: 5.3 We have thus also noted that the Hon’ble coordinate Benches of this tribunal in the case of M/s. Nippon paint India Pvt Ltd, Hyundai Motor India Pvt Ltd and others including assesse’s own case for 2007-08 have held that AMP spending’s are not international transactions and deleted the impugned additions in respective cases. It has accordingly been concluded in decision in assesse’s own case for 2007-08 Supra that any addition on this account would be unjustified. No change in facts qua those of AY-2007-08 has been brought to our notice. Accordingly in respectful compliance to the decision of the coordinate bench of this tribunal in assesse’s own case for 2007-08, we set aside the order of lower authorities and direct the Ld. AO to delete the impugned addition. Accordingly ground of appeal no.8 is allowed. 6.0 The next issue raised by the assesse through ground of appeal no.9 is regarding erroneous selection of comparable companies for business processing service segment. The Ld. TPO had proposed an adjustment of Rs.8,58,09,699/-. The DRP confirmed the findings of this issue as contained in page 6 to 14 of its order. Before us the Ld. Counsel of the assesse informed that the “….FIPL performs a limited amount of administrative and other ancillary services for Ford U.S. Standard “Business process services” (“BP serves”) are standard accounting tasks, ITA No.669/Chny/2017 :- 40 -: human resources processing (HR); information technology management and contract testing; research; engineering; marketing, sales, and service(MS&S); customer service operations(CSO); product testing and homologation; finance; purchase; and material, planning and logistics(MP & L)…”. The Ld. Counsel submitted that in its TP study report it had selected 13 comparables for bench marking the transactions in DP services segment. During the TP proceedings, the Ld. TPO rejected five comparables and included 11 new comparables and finally concluded his report with 15 comparables. The comparables rejected by the Ld.TPO were as under:- Sl. No. Company Name NCP FY-2011-12 Accepted / Rejected 1. Cameo Corporate Services Ltd. 7.5% No sales during the year. Hence rejected 2. Cyber media research limited -30.51% Persistent loss making entity hence rejected 3 Professional Management Consultant Pvt Ltd -28.78% Persistent loss making entity hence rejected 4 Sparsh BPO services Ltd -26.66% Persistent loss making entity hence rejected ITA No.669/Chny/2017 :- 41 -: 5 TVS – E Services Ltd -13.00% Persistent loss making entity hence rejected 6.1 The Ld. Counsel for the assesse argued for inclusion of entities at Sl.3 to 5 above. It was submitted that Hon’ble Bombay High Court in the case of Goldman Sachs(India) Securities Pvt Ltd has held that a company can be considered as persistent loss making only if it has incurred losses in all the three years and cannot be considered so if it had earned profit in either of the three years. Attention was invited to the The following observations of the Hon’ble Bombay High Court “…The revenue on the other hand contended that Capital Trust Limited is a persistent loss making unit and thus, cannot be used as comparable for the purpose of determining the ALP. The Tribunal by the impugned order held on a finding of fact that for the Assessment Year 2005-06 – Capital trust Ltd. has made a profit although it made a loss for the subsequent two years namely Assessment Year 2006-07 ad 2007-08. However, the impugned order of the Tribunal inter alia relies upon its order in the case of Brigade Global Services (P) Ltd. v. ITO(2013) 33 Taxmann.com 618(Hyd – Trib.) rendered by the coordinate Bench at Hyderabad – wherein it is held that only persistently loss making unit cannot be said as comparable. In this case, the impugned order holds on facts that Capital Trust Ltd. it is not a persistent loss making unit. Therefore, Capital trust Ltd. is comparable…”. In support of its contentions, the Ld. AR drew ITA No.669/Chny/2017 :- 42 -: attention to its paper book at pages 226 to 228, volumn-I where the NCP margin earned by the three entities to be included was indicated. Thus, Professional Management Consultant Pvt Ltd and TVS – E Services Ltd had reportedly shown profit in one out three years and Sparsh BPO services Ltd in two out of three. It was admitted by the Ld. AR that the impugned annual reports of above three companies could not be produced before the Ld. TPO and Hon’ble DRP thereby not affording them an opportunity to verify the same. Reference was invited to para 48 & 49 of the DRP order confirming the above hypothesis propounded by the assesse. 6.2 We have heard the rival submissions in the light of material available on records. It is an undisputed fact of the case that the financials of the above three companies were not provided to the lower authorities. We find sufficient force in the argument of the assesse qua reliance placed on the decision of Hon’ble Bombay High Court in the case of Goldman Sachs Supra. We there deem it fit to restore the matter to the file of the Ld. TPO for readjudication de novo qua inclusion of above three companies in his TP study after giving an opportunity of being heard to the assesse and passing of an speaking order. The assesse is directed to submit the impugned financials before the TPO for consideration. ITA No.669/Chny/2017 :- 43 -: 6.3 Coming to the two entities for which assesse had requested for exclusion namely Infosys BPO Ltd and HSCC India Ltd the arguments put forth have been considered. The Ld. Counsel for the assesse has argued that Infosys BPO Ltd deserves exclusion on account of lack of any viable comparison as far as its turnover is considered. It was submitted that established in 2002 as business process out sourcing subsidiary of Infosys Ltd, it is, as per NASSCOM ranking, among top ten third party BPO companies in India. The turnover of Infosys BPO for FY-2011-12 was reported to be Rs.1312 Crs which is nearly 25 times higher than that of the assesse in BP Services segment. It was argued that ordinarily turnover filter are restricted to comparables within the range of 1/10 to 10 times of the assesse’s turnover. In support of its arguments the Ld. DR relied upon the decision of Hon’ble Madras High Court in the case of visual graphics computing services(India) Pvt Ltd. (TS-709-HC-2020(Mad)-TP for AY-2012-13). Additionally the Ld. AR also placed its reliance upon a catena of other judgements copies of which have been placed in the paper book filed. 6.4 On the subject of exclusion of M/s.HSCC of India Limited it was argued that it is a government owned company engaged in the activity of design engineering / studies / training / information technology, procurement services and project management services on construction ITA No.669/Chny/2017 :- 44 -: contract placing reliance upon its annual report, it was submitted that one of the important source of revenue for HSCC is from project management on construction contracts, an activity fundamentally different then business of assesse in BP Services segment. Thus it was argued that M/s.HSCC India Ltd is also distinguished as a comparable. The Ld. DR vehemently argued in favour of the order of the Ld. TPO and DRP. 6.5 We have heard the rival submissions in the light of material available on records. As far as requested exclusion of Infosys BPO Ltd is concerned we have noted that the case of the assesse, on turnover aspect, is covered by following observations of the Hon’ble Madras High Court:- “….7. On perusal of the memorandum of grounds of appeal as well as the order of the Hon’ble Division Bench dated 03.04.2018, we find that this issue has not been agitated by the Revenue, insofar as the assessee’s own case for the assessment year 2008-09. Therefore we confirm the finding of the Tribunal directing the exclusion of Infosys BPO Limited from the lift of comparables. The conclusion arrived at by us is duly supported by the decision of the Hon’ble Division Bench of the Karnataka High Court in PCIT Vs. Swiss Re Global Business Solutions India Pvt. Ltd. (2018) 96 taxmann.com 643(Kar.HC). The order impunged in the said appeal passed by the Tribunal noted that the turnover of Infosys BPO Limited is Rs.649.56 Crores while the Turnover of the assesse company therein was Rs.11 Crores, which is much more than 65 times of the said assessee’s turnover and therefore, the Court held that thre is no illegality or infirmity in the order passed by the Commissioner of Income Tax (Appeals) (‘CIT(A)’ for brevity) excluding the said Company out of the comparables. The Court also take note of the decision of the High Court of Punjab and Haryana in the case of Agilant Technologies (International) Pvt. Ltd Vs. ACIT 2015 SCC OnLine P&H 10135 and held that the Companies having turnover of more than 23 times of the assesse’s turnover cannot be compared with the assesse. The decision of Bombay High Court in the case of CIT Vs. M/s.Pentair Water India Pvt. Ltd [(2016) 381 ITR 216] was also taken note ITA No.669/Chny/2017 :- 45 -: of in PCIT Vs. Sanvih Info Group Private Limited (I.T. Appeal No.420 of 2019 (Del.HC) dated 16.05.2019. The Court noted the discussion in Chry Cpital Investment Advisors India (P) Ltd. Vs. Deputy Commissioner of Income Tax [2015 376 ITR 183 (Del)], wherein it was stated that Infosys Technologies Ltd, cannot be compared with the respondent assesse(therein), as seen from the financial data and it should be excluded from the list of comparables for the reason that it was a giant Company in the area of development of software….” 6.6 As regards exclusion of M/s HSCC India Ltd we find sufficient force in the argument that the company is bereft of any meritorious comparable given the same being a government company as well as one engaged in a totally different line of business. Accordingly we are of the view that the requested two companies cannot be included in the TP study by the TPO. We therefore deem it fit to restore the matter to the file of the Ld. TPO for recalculation of his adjustments after excluding M/s.Infosys BPO Ltd & M/s HSCC India Ltd from his TP study. 6.7 Thus as regards ground of appeal No.9 the Ld. TPO is directed to recalculate his upward adjustments qua business process segment after including the comparables namely Sparsh BPO services Ltd, Professional management Consultants Private Limited and TVS E-Service tec Limited, and excluding Infosys BPO Ltd and HSCC(India) Ltd. The assesse is directed to submit any required details, financials etc to the LD TPO for his consideration. The Ld. TPO shall give due opportunity of being heard to the assesse and shall pass an speaking order. Accordingly, the ground of appeal No.9 is partly allowed. ITA No.669/Chny/2017 :- 46 -: 7.0 The next issue raised by the assesse through ground of appeal no.10 is regarding product development expenses. The order of the Ld. TPO indicates that vide discussions from page 61 to 65 of his order he had discussed the issue of product development expenses and had proceeded to propose a downward adjustment of Rs.41,97,76,737/-. It is further noted that in its appeal before the DRP the impugned issue was raised by the assesse vide its objections ground no.4. Para-61 of Page 18 of the DRP order alludes that in consideration of the decision of Hon’ble Coordinate Bench of this tribunal in assesse’s own case for AY-2007-08 vide ITA No.2089/Mds/2011, the DRP directed the Ld. AO to follow the order of the Hon’ble tribunal and restricted the downward adjustment to Rs.20,98,88,368/-. 7.1 In this regard we have noted that the following decision of Hon’ble Coordinate Bench of this tribunal in its own case for AY-2007-08 vide ITA No.2089/Mds/2011 :- “….53. Coming to the last question which is the disallowance of product design expenditure of 14.84 Crores, finding of the TPO is that ownership of the developed product vested with FMC and therefore, expenditure incurred in development of the product had to be attributed to FMC. On the other hand, as per assessee, it was only improving on various models of the cars manufactured and sold in India and economic ownership of the product improvement was with it, though legal owner was FMC. We are of the opinion that both the assessee as well as FMC had benefitted from the product development expenditure incurred. Through the technical collaboration agreement, assessee derived all assistance including technical knowhow for manufacturing various models of the ITA No.669/Chny/2017 :- 47 -: cars, though ownership of all such knowhow was with M/s FMC. Assessee was doing research and development work for improving the cars, but nevertheless, the ownership over such innovations were also with FMC. Fruits of the improvement, which was better engineered cars, was enjoyed by the assessee whereas ownership was with M/s FMC. In other words, assessee had an economic advantage derived out of such product development expenditure. Therefore, we cannot say that the expenditure was incurred solely for the benefit of FMC. It could have been held so, if the corporate veil was lifted. But, there was no argument from the side of the Revenue that there existed any circumstance which required lifting of the corporate veil. As long as FMC and assessee were separate legal entities having separate legal existence, we cannot say that expenditure incurred by the latter was wholly for the benefit of former, when specific economic advantage was derived by the assessee as well. In such circumstances, we are of the opinion that 50% of the advantage derived on account of product development spendings ensued to the assessee and the balance 50% to FMC. So, the product development expenditure that has to be recouped from FMC has to be considered at 7.42 Crores. Thus, the question regarding product development expenditure is answered partly in favour of assessee. …” 7.2 We have noted that the facts of present case are identical to the one adjudicated by the Hon’ ble Coordinate Bench Supra. Accordingly, in respectful compliance we confirm the findings of the DRP. The ground of appeal no.10 raised by the assesse is therefore dismissed. 8.0 The next issue raised by the assesse through ground of appeal no.11 is pertaining to addition made by the Ld. AO of Rs. 11,83,06, 406/- on account of advances received from customers towards extended warranty. The Ld. Counsel for the assesse submitted that the Ld. AO has discussed this matter at para-7 of his order. According to the Counsel the Ld. AO was informed that the cars sold by assesse carry a ITA No.669/Chny/2017 :- 48 -: warranty in favour of buyers as per the contractual agreement ranging from a minimum period of one years and extended upto four years. The assesse binds itself to rectify contracted defects arising during the contract period. It was argued that for providing extended warranty an additional amount in the form of an advance is collected from the customers. These advances wherever unclaimed are evenly amortized for revenue recognition across warranty period. The assesse informed Ld. AO that under mercantile system of accounting accrual of income is independent of its receipt and that so long as a customer has some say over the amount which it has paid to the payee it cannot be deemed as income of the assesse. The Ld. Counsel for the assesse submitted that the AO held the view that just like the base warranty, which is part of the sale price and hence offered as income of year of sale, the extended warranty would also be income of the year of sale and no distinction can be made. The Ld. AO differed with the assesse on the argument for treating the two separately. The Ld. Counsel for the assesse informed that base warranty and extended warranty cannot be treated at par as the amount of base warranty is embedded in the price of the car whereas the extended warranty is separately built through separate invoice. It was argued that the extended warranty contract are revocable and hence no income would accrue in the year of receipt. It was also argued that if ITA No.669/Chny/2017 :- 49 -: extended warranty is treated as income in the year of sale then a case of double taxation would arise because the said extended warranty would be offered to tax in the year of its completion. The Ld. CIT.DR would like us to rely upon the order of the assessing officer. 8.1 We have heard the rival submissions in the light of material available on records. It is an undisputed fact of the case that the appellant has received amounts qua extended warranty and which have not been offered as income of the year under consideration. It is also an admitted fact of the case that the amounts in respect of unfulfilled extended warranty commitments would be offered to tax in the year of its completion. This brings us to the issue of examination of the concept of warranty including two types of warranty germane to the dispute. Warranty is a form of quality assurance offered by a manufacturer to its customers in the form that in the event of any manufacturing defects etc the seller would rectify the defects during the warranty period. Even though in market the warranties are projected as free rectifications the fact of the matter is that every seller collects some amount in the sale price itself to offset costs arising in any future claims. As fairly conceded by the assesse, it is collecting an amount qua base warranty from the customers at the time of sales. The assesse over and above the base warranty period, let us say for two years as in this case, offers another ITA No.669/Chny/2017 :- 50 -: warranty known as extended warranty to the customers with the promise that in case a defect comes in the product even after two years then it shall rectify the same. In lieu of this assurance, the assesse collects as an advance payment the extended warranty amount from its customers. As per terms of contract, the extended warranty contract comes to force only after the completion of base warranty agreement. Naturally the extended warranty receipts taken during the year of sales would become income of the assesse, if any in the year when such warranty agreements becomes enforceable. At this stage it is also pertinent to point out that not all receipts received on account of extended warranty contracts would become income of the assesse even in the year when such warranty agreements becomes enforceable. Simply because only those components of extended warranty receipts would be income of the assesse which have not been claimed by the customers. The amounts received qua extended warranty contracts are akin to prepaid expenses for repairs of cars. Naturally assesse will deem only those amounts as its income in respect of which no claims arose by the customers. Wherever warranty claims were made by customers pointing out some defect in the car, the assesse would not be showing the same as its income. ITA No.669/Chny/2017 :- 51 -: 8.2 The amounts received on account of extended warranty by the assesse therefore would become its income only in the year in which such extended warranty contracts mature. Now as the assesse has already been offering the said amounts in the year of maturity of such contracts, there taxation in the year of sale of car would certainly tantamount to a case of double taxation. Accordingly, we are of the view that the amounts received by the assesse as advance from customers towards extended warranty of Rs.11,83,06,406/- and added by the Ld. AO was not required. Accordingly, Ld. AO is directed to delete the addition. The ground of appeal No.11 raised by the assesse is therefore allowed. 9.0 The next issue raised by the assesse through ground of appeal no.12 is regarding disallowance of foreign currency payments made u/s 40(a)(i). The Ld. Counsel for the assesse informed that the Ld. AO has disallowed certain foreign currency payments by invoking provisions of section 40A(i)(a) of the Act holding that these payments were made towards fee for technical services(FTS), royalty, reimbursement of expenses, installation and commissioning charges which required TDS deduction. The Ld. Counsel informed that the disallowance was made on account of absence of NIL withholding certificate from assessing officer. ITA No.669/Chny/2017 :- 52 -: It was submitted that the assesse was not required to withhold tax in respect of impugned payments. The Ld. Counsel argued that the issue is also covered by orders delivered by Hon’ble Coordinate Bench of this tribunal in assesse’s own case. The Ld. DR placed reliance upon the orders of lower authorities and vehemently argued in support thereof. 9.1 The details of parties covered, nature and amount of transactions contained in DRP order dated 23.12.2016 available on page- 21 and 22 of his order are extracted as under:- “…… Sl. No. Party Amount (Rs.) Nature of remittance Fees for Technical Services(‘FTS’) 1 Cinetic Filling, France 11,170 The Remittance is towards modifications to Coolant fill machine adaptor. 2 Deutsche Bank, Singapore 17,080,437 The remittance is towards fees for Monthly advisory retainer fee for the period of 14th October 2011 to February 2012 and charges for travel, accommodation and conference calls. 3. Autoconsol (Thailand) Co Ltd. 14,298,185 The remittance is towards regular preventive maintenance of B517 Sash RSR by supplier from April 2010 to November 2010. Installation and commissioning of charges. 4. Ford Motor 10,081,008 The remittance is towards C195 ITA No.669/Chny/2017 :- 53 -: Company Limited, Australia Tooling programme which includes supply, engineering support and try out for hood inner, out and clinching dies. 5. Visteon Electronics Corporation, USA 302,400 The remittance is towards fees for overtime work for manufacturing the production (A/C tube) to meet the TT (Tools try out) build requirement. 6. Systran Software Inc., USA 208,558 The remittance is towards, Annual license fee of additional language pairs, translation server, online tools and application packs, development software licenses. Annual license includes maintenance and support. Reimbursement of expenses 7. Ford Corporate & Employee Insurance, USA 227,754 The remittance is towards reimbursement of expenses of plant fire protection engineering services. 8. Ford Group, Philippines 1,056,462 The remittance is towards reimbursement of expenses incurred towards Everest media ride and drive. 9. Ford Motor Company, USA 2,597,283 The remittance is towards fire protection engineering services. 10. Ford Motor Company, USA 2,684,142 The remittance is towards reimbursement of actual costs on environmental resources management (Environment Regulatory Support). ….” 9.2 The Ld. Counsel for the assesse informed that the DRP has held the view that the assesse is in no position to decide upon taxability of ITA No.669/Chny/2017 :- 54 -: amounts given to the foreign entities and that therefore it was mandatory upon it to have deducted the TDS. It has also been held that in case there was a case of not taxability and corresponding non-deduction of TDS on the impugned receipts then it was imperative upon the deductees to have applied for non-deduction TDS certificates from competent authorities. The Ld. DR vehemently argued in favour of authorities below. 9.3 We have noted that Hon’ble Coordinate Bench of this tribunal in assesse’s own case for AY-2011-12 and AY-2012-13 had passed orders vide ITA Nos. 673, 840, 748 and 749 qua cross appeals filed by the assesse as well as the revenue. The impugned decision was in respect of orders passed u/s 201(1) / 201(1A) of the IT Act. We have noted that the Hon’ble Coordinate Bench of this tribunal had examined at length the issues of non-deduction of TDS by the assesse in respect of similar nature of transactions as well as many parties who are common in the two appeals. Thus, parties namely Cinetic Filing France, Autoconsol(Thailand) Company Ltd, Ford Motor Company Australia Visteon Electronic Corp USA, Systran Software Inc. USA find reference in the impugned order. We have also noted that while delivering its decision the Hon’ble Coordinate Bench discussed at length comprehensively issues surrounding double taxation agreements, “make ITA No.669/Chny/2017 :- 55 -: available” concepts Viz a Viz fee for technical services, issue of PE etc. The Hon’ble Bench had concluded the matter in favour of assesse by accepting appeals raised by the assesse and dismissing those preferred by the revenue. It has however been noted that as regards the decision of Hon’ble Coordinate bench qua the case of Cinetic filing is concerned, it has been noted that the same stands reversed in view of decision of Hon’ble Apex Court in the case of Nestle India (CA No.1420 of 2023) on account of MFN clause. Accordingly, the addition made by Ld. AO is confirmed. Further, on the issue of payments made to Ford Motor Company Australia and Visteon Electronic Corporation USA is concerned the Ld. AO is directed to reconsider his additions in the light of directions given by Hon’ble Coordinate bench in assesse’s own case Supra. The rest of the disallowance made by the Ld. AO are deleted in respectful compliance to the decision of Hon’ble Coordinate bench of this tribunal in its impugned decision in assesse’s own case Supra. Accordingly, ground of appeal no. 12 raised by the assesse is partly allowed. 10.0 The next issue raised by the assesse through ground of appeal no.13 is regarding disallowance of provision for expenses reversed and claimed amounting to Rs.3,63,12,391/-. The Ld. Counsel for the assesse invited our attention to para-11 of AO’s order wherein it has been held that the assesse was requested to file details of TDS deducted on ITA No.669/Chny/2017 :- 56 -: said expenses of earlier years in respect of which reversal was made. The Ld. AO held that as the assesse could not provide any valid proof in support of its claim that TDS had been deducted, no allowance thereof can be made. The Ld. Counsel for the assesse submitted that its arguments of allowing provisions which were created in a particular year and added back therein would require to be allowed in the year of its reversal, were not accepted by the DRP. It was submitted that the DRP was of the view that any expenditure is to be allowed only when made for the purposes of business and where the liability to spend has crystalized. Mere reversal would not justify an allowance. The DRP had noted that party wise details were not furnished before the AO and that in respect of few payees TDS was also not deducted. The DRP also noted that as regards allowance of amounts disallowed in last year, the same was untenable given the fact that no claim was made in the return of income. The Ld. DR would like to make us to believe the correctness of the order of lower authorities. 10.1 We have heard rival submissions in the light of material available on records. We have found sufficient force in the argument of DRP that any expenditure is to be allowed only when made for the purposes of business and where the liability to spend has crystalized. We are also in agreement with observation that when the liability in hands of assesse is ITA No.669/Chny/2017 :- 57 -: ascertained then the receipt in hands of payee also becomes ascertained. Admittedly, the assesse has not deducted TDS on certain receipts. We have also noted the observations of DRP regarding no claim having been made by the assesse qua some expenses in the return of income. We have also noted that the assesse has not provided details of TDS to the Ld. AO. It has been noted that the Ld. AO also not clearly brought out in his order detailed bifurcation of the expenses as to viz expenses involving TDS deduction, those pertaining to last year and which were not claimed during the year etc. Be that as it may be we are of the view that ends of justice would be met if the matter is restored to the file of the AO for readjudication after doing necessary verification. Accordingly, we set aside the order of lower authorities on this account and direct the Ld. AO to obtain all necessary details from the assesse and readjudicate the matter by way of an speaking order after giving due opportunity of being heard. The assesse shall comply with all the notices of AO. Accordingly, ground of appeal no. 13 is allowed for statistical purposes. 11.0 The next issue raised by the assesse through ground of appeal no.14 is regarding denial of set off of brought forwarded losses. The Ld. Counsel for the assesse invited our attention to last para of page-20 of AO’s order wherein the Ld. AO had denied the set off of brought ITA No.669/Chny/2017 :- 58 -: forwarded losses comprising depreciation pertaining to AY-1997-98 and 1998-99. DRP had directed the AO to examine the matter and take his decision. The AO justifying its action had relied upon the decision of Hon’ble Special Bench of the ITAT Mumbai in the case of DCIT Vs Times Guaranty Ltd (2010) 4 ITR (T) 210 Mumbai (SB) dated . The Ld. AO held that from the impugned decision it is evident that depreciation computed in AY-97-98 to 2001-02 are to be subjected to the provisions brought in by the finance act 1996. According to AO this entailed that unobserved depreciation originally computed in respective AYs cannot be carry forward beyond 8 succeeding AYs. It was so because the substituted section 32(2) brought in by finance act 2001 is applicable prospectively. The Ld. Counsel for the assesse submitted that the AO held the view that accordingly depreciation computed in AY-1997-98 and 1998-99 would lapse in 2005-06 and 2006-07 respectively. It is the case of the assesse that the restriction of 8 years is not applicable for set off of unobserved depreciation. It was argued that Hon’ble Coordinate Bench of this tribunal in assesse’s own case vide ITA No.2344 & 2345 / Mds/2010 has directed the AO to allow unobserved depreciation of AY- 97-98 & 98-99. 11.1 We have heard rival submissions in the light of material available on records. As regards assesse’s reliance upon the decision of the ITA No.669/Chny/2017 :- 59 -: Hon’ble Coordinate Bench of this tribunal in assesse’s own case at ITA No.2344 & 2345 / Mds/2010 dated 12.05.2017 Supra, the same has been examined. It has been noted that the Hon’ble Coordinate Bench has observed as under:- “……9.0 The next issue is carry forward and set off of unabsorbed depreciation for the AY 1997-98,1998-99 and 1999-2000. This issues is involved in both the AYs 2005-06 & 2008-09. The AO in the assessment: - 19 -: ITA Nos.2344 & 2345/Mds/2012 Order, did not allow the carry forward and set off unabsorbed depreciation losses loss for the AY 1997-98 as per the following reasons: In the statement of total income filed along with the Return, the assessee claimed the unabsorbed depreciation losses of following years. • Assessment year 1997-98 • Assessment year I 998-99 • Assessment year 1999-00 : Rs.4,05,34,542 : Rs.3,31 27,564 : Rs.8,27,63,426 As per provisions of sec.32(2) of the Act, as applicable for the above assessment years, unabsorbed depreciation can be carried forward only for a period of subsequent 8 assessment years and can be set off only against business income of subsequent years. Only with effect from asst year 2002-03, sec.32(2) has been amended to the effect that unabsorbed depreciation losses would be merged with subsequent years depreciation and deemed to be part of that allowance. This amendment is applicable only from asst year 2002-03 and for the above years, viz., 1997-98 to 1999-2000, as per provisions of sec.32(2), the unabsorbed depreciation is allowed to be carried forward and set off against business profits of subsequent 8 asst years. Out of the unabsorbed depreciation of Rs.4,05,34,542/- of A.Y.1997-98, an amount of Rs,1,85,57,771/- is now set off against profits of A.Y.2005-06, as shown above. The balance unabsorbed depreciation of Rs.2,19,76,771/- pertaining to A.Y.1997-98 cannot be carried forward beyond asst year 2005-06 as per the provisions of sec.32(2) of the Act applicable for this year. Similarly, unabsorbed depreciation of AY.1998-99 (Rs.3,31,27,564) and A.Y.1999-2000 (Rs.8,27,63,426) cannot be carried forward beyond asst years 2006-07 and 2007-08 respectively, as per the provisions of sec.32(2) of the Act applicable for these assessment years. 9.1 During the appeal hearing, the AR of the assessee made the following submissions orally as well as in writing: The Appellant submits that the AO has erred in restricting the carry forward of unabsorbed depreciation of the earlier years by erroneously interpreting the provisions of law on the aforementioned claim without taking into cognizance that the unabsorbed depreciation of any preceding previous year(s) should be considered as the previous year’s depreciation as provided under section 32(2) of the Act (amended by the Finance Act, 2001). The Appellant places reliance on the decision of the jurisdictional Tribunal in the case of KMC Speciality Hospitals India Ltd. [2014] 32 ITR(T) 149 (Chennai Tribunal) wherein it was held that the interregnum restriction of limiting the claim for an eight-year period does not take away the right of an assessee to claim the balance of unabsorbed depreciation, forever. Further, by virtue of the amendment bought out by the Finance Act 2001, the unabsorbed depreciation for the interregnum period (AY 1997-98 to AY 2001-02) would revive back into life and become eligible for carry forward and set off for an ITA No.669/Chny/2017 :- 60 -: indefinite period. Further, in the case of Best & Crompton Engineering Ltd. [2014] 30 ITR(T) 638 (Chennai Tribunal), the Hon’ble Chennai Tribunal placed reliance on the decision of the Gujarat High Court in the case of General Motors India (P.) Ltd. v. Deputy Commissioner of Income-tax [2012] 354 ITR 244 and held that, the unabsorbed depreciation prior to AY 2002-03 i.e. from AY 1999-2000 to AY 2001-02 would be available for carry forward and set off against income of subsequent years without any time limit in view of the section 32(2) as amended by Finance Act, 2001. :- 20 -: ITA Nos.2344 & 2345/Mds/2012 The observations made by the Gujarat High Court in the case of General Motors India (P.) Ltd (supra) and followed by the Chennai Tribunal in the case of Best & Crompton Engineering Ltd. (supra) are elucidated below: • Prior to the Finance Act No.2 of 1996, the unabsorbed depreciation for any year was allowed to be carried forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No.2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the AY 1997-98. CBDT Circular No.762, dated 18 February 1998, in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. So, the unabsorbed depreciation allowance of AY 1996-97 would be added to the allowance of AY 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from AY 1997-98. • The provision of section 32(2) was introduced by Finance (No. 2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No. 2) Act, 1996 was clarified by the Finance Minister to be applicable with prospective effect. This amendment has become applicable from AY 2002-03 and subsequent years meaning that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (AY 200203) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. If the intention of the Legislature had been to allow the unabsorbed depreciation allowance worked out in AY 1997-98 only for eight subsequent AYs even after the amendment of section 32(2) by Finance Act, 2001, it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence, a purposive and harmonious interpretation has to be taken keeping in view the purpose of amendment of section 32(2). While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the Legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of section by the clear words used in section, the benefit accruing to the assessee cannot be denied. • However, Circular No.14 of 2001 had clarified that under section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the AYs 1997- 98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the AY 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years. • It is held that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y 2002-03) will be dealt with in accordance ITA No.669/Chny/2017 :- 61 -: with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from AY 1997-98 up to the AY 2001-02 got carried forward to the AY 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. The aforesaid principles have been reiterated and relied on by the following judicial precedents — • CIT v. Gujarat Themis Biosyn Ltd. [2014] 228 taxman 359 (Gujarat High Court) • Arc Fine Chemicals Private Limited v. ACIT [PTA No. 2414/2415/2012] (Mumbai Tribunal) • Confidence Petroleum India Ltd v. OCIT [PTA No. 1937/ 2012] (Mumbai Tribunal) • DCIT v. Bajaj Hindustan Ltd. [2014] 149 ITD 709 (Mumbai Tribunal) • Smith & Nephew Healthcare (P.) Ltd. v. DCIT [2014] 32 ITR(T) 208 (Mumbai Tribunal) • Hindustan Unilever Ltd. v. ACIT [2012] 22 ITR(T) 737 (Mumbai Tribunal) :- 21 -: ITA Nos.2344 & 2345/Mds/2012 In addition to the above, the jurisdictional Madras High Court in the case of CIT V. S & S Power Switchgear Ltd. [2009] (218 CTR 701) (Madras) had upheld the principle that that the unabsorbed depreciation allowance of one year shall be added to the depreciation allowance of the next year and will be deemed to be the allowance of that year. Furthermore, the Hon’ble Chennai Tribunal in the case of DCIT V. Tamil Nadu State Transport Corporation (Villupuram) Limited [2012] I.T.A. No. 1713/Mds/2011 had placed reliance on Circular 762 (supra) and the aforesaid ruling and held as under: “In view of the above circular, and also in view of the decision of the jurisdictional High Court, in the case of CIT v. S & S Power Switchgear Ltd., (218 CTR 701) (Madras) the entire depreciation that was brought forward to the AY 1996-97 and the net unabsorbed depreciation computed for the AY 1996-97 and carried forward to the AY 1997-98 becomes the depreciation allowance of AY 1997-98. The unabsorbed depreciation allowance after set off against the income of the current year, will become the unabsorbed depreciation allowance of AY 1997-98 and the limitation of 8 years, as per the amended provisions of sec.32(2), starts from the AY 1997-98. Therefore, all the depreciation allowances that are brought forward from the earlier years and were available during the AY 1997-98 can be carried forward for another period of 8 years i.e., up to AY 2005-06. In any case, with the change in the provisions of section.32(2) w.e.f. 01.04.2002 the unabsorbed depreciation once again was made available to the assesse indefinitely by clubbing with the current depreciation allowance.” In light of the above jurisdictional decisions, the Appellant had submitted that the brought forward unabsorbed depreciation of AY 1997-98, 1998-99 and 1999-2000, to the extent not set-off against the income of AY 2005-06, be allowed to be carried forward to the future years for an indefinite period. 9.2 We heard the rival submissions and perused the material placed on record. The Ld.AR relied on the decision of this Tribunal in of DCIT V. Tamil Nadu State Transport Corporation (Villupuram) Limited [2012] I.T.A. No. 1713/Mds/2011 Circular No.14 of 2001 and jurisdictional High Court of Madras cited supra. This issue is squarely covered by the decision of this Tribunal and the case law relied upon by the assessee cited supra. 9.3 Respectfully following the order of this Tribunal in the cited case we direct the AO to allow the unabsorbed depreciation of AY 1997-98, 1998-99, 1999-2000 to the extent not set off against the income of the AY 2005-06 for future years. The appeals of the assessee on this issue for the AY 2005-06 & 2008-09 are allowed…”. ITA No.669/Chny/2017 :- 62 -: 11.2 In respectful compliance to the order of the Hon’ble coordinate bench Supra we hold the view that the assesse is eligible for claim of its unobserved depreciation. The Ld. Assessing Officer is therefore directed to allow the same to the assesse. Accordingly, the ground of appeal No.14 raised by the assesse is allowed. 12.0 Ground of appeal No.15 is regarding initiation of concealment of penalty proceedings. The ground of appeal is premature in nature and bereft of any specific adjudication, hence dismissed. 13.0 In the result the appeal of the assesse is partly allowed. Order pronounced on 22nd , November-2024 at Chennai. Sd/- ( एबी टी. वकी) (ABY T VARKEY) न्याययक सदस्य / Judicial Member Sd/- (अमिताभ शुक्ला) (AMITABH SHUKLA) लेखा सदस्य /Accountant Member चेन्नई/Chennai, ददनांक/Dated: 22nd , November-2024. KB/- आदेश की प्रयतललपप अग्रेपषत/Copy to: 1. अपीलार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai 4. पवभागीय प्रयतयनधि/DR 5. गार्ड फाईल/GF "