Hyundai Motor India Limited, Kancheepuram V. ACIT LTU-2, CHENNAI

ITA 3192/CHNY/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7791 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 21-01-2021
• Assessment Year: 2013-2014
• Appeal Filed On: 26-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANITAJCIT
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Rule of consistency; Earning of tax free income; Wholly owned subsidiary; Fair market value; Capital receipt; Revenue expenditure; Capital expenditure; Rule 8D; Set aside
• Section: 43B; 92F; 92A; 92E; 14A; 64; 43; 48; 73; 72; 13; 22; 6; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . , . , & BEFORE SHRI V.DURGA RAO, JUDICIAL MEMBER AND SHRI G.MANJUNATHA, ACCOUNTANT MEMBER ./ I.T.A.NO.3192/CHNY/2017 ( / ASSESSMENT YEAR: 2013-14) M/S. HYUNDAI MOTOR INDIA LTD. PLOT NO.H-1, SIPCOT INDUSTRIAL PARK IRRUNGATTUKOTTAI, SRIPERUMBUDUR TALUK KANCHEEPURAM DIST. PIN: 602 117. VS THE ASSISTANT COMMISSIONER OF INCOME TAX, LTU-2, CHENNAI. PAN: AAACH 2364M ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. SRIRAM SESHADRI, C.A & MR. ASHIK SHAH, C.A /RESPONDENT BY : MS. ANITA,JCIT /DATE OF HEARING : 16.07.2021 /DATE OF PRONOUNCEMENT : 01.09.2021 / O R D E R PER G. MANJUNATHA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/ S.143(3) R.W.S 144C(13) OF INCOME TAX ACT, 1961 DATED 30.10. 2017, IN PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP-2, BE NGALURU DATED 16.09.2017 U/S.144C(5) OF INCOME TAX ACT, 1 961 FOR THE ASSESSMENT YEAR 2013-14. 2 ITA NO.3192/CHNY/2017 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF AP PEAL:- 1. THE ORDER OF THE LEARNED ASSESSING OFFICER (LD . AO), THE LEARNED TRANSFER PRICING OFFICER (LD. TPO) AND TH E DIRECTION ISSUED BY THE HONBLE DISPUTE RESOLUTION PANEL (HO NBLE DRP) ARE NOT IN ACCORDANCE WITH THE LAW, CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND MADE IN VIOLA TION OF PRINCIPLE OF EQUITY AND NATURAL JUSTICE. 2. DISALLOWANCE UNDER SECTION 14A 2.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO AND HONBLE DRP ERRED IN DISALLOWING A SUM OF INR 86,54 ,491/- UNDER SECTION 14A OF THE ACT BY APPLYING PROVISIONS OF RU LE 8D OF THE INCOME TAX RULES, 1962 (RULES) 3.DISALLOWANCE OF SUBSIDY RECEIVED TOWARDS CAPITAL EXPENDITURE. 3.1 THE LD. AO AND HONBLE DRP OUGHT TO HAVE APPREC IATED THAT THE SUBSIDY WAS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX AND THAT IT CANNOT ALSO BE ADJUSTED AGAINST THE COST OF FIXED A SSETS IN COMPUTING THE DEPRECIATION ALLOWABLE TO THE APPELLA NT. 4. DISALLOWANCE OF BONUS/ PERFORMANCE REWARD UNDER SECTION 43B OF THE ACT 4.1 THE LD. AO AND HONBLE DRP HAVE FAILED TO APPRE CIATE THAT THE EXPENDITURE INCURRED BY THE APPELLANT TOWARDS PERFORMANCE REWARD IS NOT IN THE NATURE OF BONUS AND CANNOT BE DISALLOWED UNDER SECTION 43B READ WITH SECTION 36(I)(II) OF TH E ACT SHOULD WE HAVE AN ALTERNATIVE CLAIM THAT IT SHOULD BE ALLO WED AT LEAST IN YEAR OF PAYMENT. 5. TAX TREATMENT OF OUTPUT VAT INCENTIVE 5.1 ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. AO AND HONBLE DRP ERRED IN NOT ADJUDICATING AND NOT ALLOW ING THE CLAIM MADE BY THE APPELLANT TO TREAT OUTPUT VAT INCENTIVE OFFERED TO TAX FOR THE SUBJECT AY, AS A CAPITAL RECEIPT NOT CHARGE ABLE TO TAX. 6. EXCESS LEVY OF INTEREST UNDER SECTION 234C 6.1 THE LD. AO ERRED IN LEVYING EXCESS INTEREST UND ER SECTION 234C OF THE ACT AMOUNTING TO INR 14,605 WITHOUT APP RECIATING THE FACT THAT LEVY OF SECTION 234C INTEREST SHOULD BE C OMPUTED ONLY ON THE RETURNED INCOME AND NOT ON THE ASSESSED INCOME. 3 ITA NO.3192/CHNY/2017 7. ADJUSTMENT FOR BRAND DEVELOPMENT SERVICES 7.1 THE LD. TRANSFER PRICING OFFICER (LD. TPO) AN D HONBLE DRP HAVE EXCEEDED THEIR JURISDICTION AND ERRED IN MAKIN G THE ADJUSTMENT TOWARDS A FEES FOR A PURPORTED BRAND DEV ELOPMENT SERVICE ALLEGED TO BE PROVIDED BY THE APPELLANT TO ITS AE, WITHOUT FIRST ESTABLISHING THAT THERE WAS ANY INTERNATIONAL TRANSACTION IN THIS REGARD BETWEEN THE APPELLANT AND ITS AE, WHICH CAN BE SUBJECT TO SECTION 92 OF THE ACT AND WITHOUT APPRECIATING THAT THERE IS NO INTENTION TO SHIFT THE PROFITS OUTSIDE INDIA. 7.2 THE LD. TPO AND HONBLE DRP FAILED IN NOT FO LLOWING THE ORDER OF THIS HONBLE TRIBUNAL IN THE APPELLANTS O WN CASE FROM AY 2007-08 TO AY 2011-12 WHEREIN SIMILAR ADJUSTMENT TO WARDS BRAND ADJUSTMENT HAS BEEN DELETED BY THIS TRIBUNAL. 7.3 THE LD. TPO ERRED IN MAKING THE ADJUSTMENT AN D THE HONBLE DRP ERRED IN UPHOLDING THE ADJUSTMENT TOWARDS BRAND DEVELOPMENT FEES WITHOUT FIRST ESTABLISHING THAT A THIRD PARTY MANUFACTURER IN INDIA WOULD HAVE RECEIVED A SIMILAR FEES FROM A THIRD PARTY OWNER OF THE BRAND, WHICH IS USED BY TH E FORMER FOR THE MANUFACTURE AND SALE OF GOODS. IN THE ABSENCE OF AN Y COMPARABLE TRANSACTION, THE ENTIRE APPROACH OF THE AUTHORITIES FAILS THE BASIC REQUIREMENT OF TRANSFER PRICING AND THE CHARGING OF THE BRAND DEVELOPMENT FEES IN COMPARABLE CIRCUMSTANCES IS NOT EVEN AN ARMS LENGTH PRACTICE. 7.4 WITHOUT PREJUDICE TO THE OTHER GROUNDS, THE LD . TPO AND HONBLE DRP ERRED IN IMPUTING THE ADJUSTMENT UNDER SECTION 92 OF THE ACT TOWARDS BRAND DEVELOPMENT FEES ON THE BASIS OF SPEARMANS RANK CORRELATION METHOD. 7.5 THE LD. TPO/AO AND HONBLE DRP HAVE ERRED IN IMPUTING AN ADJUSTMENT UNDER SECTION 92 OF THE ACT TOWARDS BRAN D DEVELOPMENT FEES, WHEN IT IS ACKNOWLEDGED BY THE TP O HIMSELF THAT THE ADVERTISEMENT AND MARKETING EXPENDITURE IN CURRED BY THE APPELLANT AS A PROPORTION OF ITS SALES IS NOT EXCES SIVE AS COMPARED TO THE SIMILAR LEVELS OF EXPENDITURE INCURRED BY CO MPARABLE COMPANIES. 8. DOWNWARD ADJUSTMENT TO THE VALUE OF IMPORTS TO T HE EXTENT INCLUDED IN THE DOMESTIC CAR SALES SEGMENT 8.1 THE LD. TPO ERRED IN REJECTING THE TRANSFER PRI CING STUDY CARRIED OUT BY THE APPELLANT WITHOUT COGENT REASONS AND ERRED IN ANALYZING DOMESTIC SEGMENT ON A STANDALONE BASIS. 4 ITA NO.3192/CHNY/2017 8.2 THE LD. TPO HAS ERRED IN BENCHMARKING THE INTER NATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS AES ON THE BASIS OF THE SEGMENT WISE PROFITABILITY DETAILS OBTAINED DURING THE ASSESSMENT PROCEEDINGS, WITHOUT APPRECIATING THAT T HE INTERNATIONAL TRANSACTIONS ENTERED INTO BY APPELLAN T ARE CLOSELY LINKED AND INTEGRATED AND CANNOT BE VIEWED IN TERMS OF SEPARATE SEGMENTS FOR TRANSFER PRICING BENCHMARKING. 8.3 THE LD. TPO HAS ERRED IN BENCHMARKING ON THE B ASIS OF THE SEGMENT WISE PROFITABILITY DETAILS PERTAINING TO D OMESTIC CAR SALES OBTAINED DURING THE ASSESSMENT PROCEEDINGS, WITHOUT APPRECIATING THAT THE DOMESTIC CAR SALES IS NOT CONSIDERED AS A SEPARATE REPORTABLE SEGMENT AS PER THE APPELLANTS AUDITED F INANCIAL STATEMENTS AND THAT THE APPELLANT DOES NOT MAINTAIN SEGMENT WISE BOOKS OF ACCOUNTS. 8.4 THE LD. TPO ERRED IN EXCLUDING CERTAIN ITEMS O F INCOME WHICH ARE OPERATING IN NATURE WHILE COMPUTING THE OPERATI NG INCOME AND OPERATING PROFITS AND ERRED IN INCLUDING CERTAIN IT EMS OF EXPENSE/LOSSES, WHICH ARE NOT OPERATING IN NATURE W HILE COMPUTING THE OPERATING COSTS AND OPERATING PROFITS. 8.5 THE LD. TPO ERRED IN NOT CONSIDERING THE ROYAL TY INCOME RECEIVED BY THE APPELLANT IN CONSIDERATION FOR THE LICENSE OF THE TRADEMARKS AND KNOW-HOW TRANSFERRED TO MOBIS IN REL ATION TO THE DISTRIBUTION OF AFTER SALES PRODUCTS, AS OPERATING INCOME WHILE COMPUTING THE OPERATING MARGINS OF THE TESTED PARTY . 8.6 THE LD. TPO ERRED IN NOT CONSIDERING THE INCEN TIVES RECEIVED FROM THE GOVERNMENT OF TAMIL NADU FOR ITS PHASE II INVESTMENTS UNDER ULTRA MEGA INTEGRATED AUTOMOBILE PROJECTS WIT HIN TAMIL NADU, AS OPERATING WHILE COMPUTING THE OPERATING MA RGINS OF THE TESTED PARTY. 8.7 THE LD. TPO ERRED IN NOT CONSIDERING THE INSUR ANCE INCOME, DISCOUNT RECEIVED FROM SUPPLIERS TOWARDS EARLY PAYM ENT OF BILLS, AND COMMISSION RECEIVED TOWARDS CAR FINANCE REFERRA LS AND CAR INSURANCE REFERRALS AS OPERATING WHILE COMPUTING TH E OPERATING MARGINS OF THE TESTED PARTY. 8.8 THE LD. TPO ERRED IN CONSIDERING FOREIGN EXCHAN GE LOSS SUFFERED BY THE APPELLANT AS OPERATING WHILE COMPUT ING THE OPERATING MARGINS OF THE TESTED PARTY. 8.9 THE HONBLE DRP ERRED IN UPHOLDING THE ACTIONS OF THE LD. TPO. 5 ITA NO.3192/CHNY/2017 8.10 THE HONBLE DRP AND LD. AO ERRED IN COMPUTING THE TRANSFER PRICING ADJUSTMENT BEYOND THE SCOPE AND JURISDICTIO N OF SECTION 92 OF THE ACT BY NOT RESTRICTING THE VALUE OF THE ADJU STMENT TO THE APPELLANTS INTERNATIONAL TRANSACTIONS WITH ITS ASS OCIATED ENTERPRISES (AE). 8.11. THE HONBLE DRP AND LD. AO ERRED IN PROPOSING THE TRANSFER PRICING ADJUSTMENT TO THE ENTIRE COST BASE OF THE A PPELLANT WHICH PREDOMINANTLY INCLUDES THIRD PARTY COSTS, ON WRONG BASIS AND ASSUMPTION OF FACTS WITHOUT GIVING AN OPPORTUNITY T O THE APPELLANT. 3. THE ASSESSEE HAD FILED A PETITION FOR ADMISSION OF ADDITIONAL GROUNDS ON THREE OCCASIONS I.E., 07.08.2 018. 27.11.2019 AND 16.01.2020. THE RELEVANT ADDITIONAL GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE REPRODUCED AS UND ER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, WE PRAY THAT EICHER MOTORS LIMITED BE HELD AS FUNCTION ALLY NOT COMPARABLE WITH OUR COMPANY AND THEREFORE TO BE EXC LUDED FROM THE FINAL SET OF COMPARABLE COMPANIES; 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LOWER AUTHORITIES OUGHT TO HAVE GRANTED ADJUSTMENT FOR DIFFERENCE IN WORKING CAPITAL OF HMIL VIS--VIS THE COMPARABLE COMPANIES SELECTED IN DETERMINING THE ARMS LENGTH PRICE AS CLAIMED IN THE TP DOCUMENTATION. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N JAW, WE PRAY THAT THE AMOUNT RECEIVED UNDER THE FOCUS MARKE T SCHEME IS CAPITAL IN NATURE AND OUGHT TO BE EXCLUDE D FROM THE COMPUTATION OF TOTAL INCOME OF THE APPELLANT FOR TH E SUBJECT AY; 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, WE PRAY THAT EDUCATION CESS AND SECONDARY EDUCATION CE SS BE 6 ITA NO.3192/CHNY/2017 ALLOWABLE AS A BUSINESS EXPENDITURE IN THE COMPUTAT ION OF TOTAL INCOME OF THE APPELLANT. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE M/ S. HYUNDAI MOTOR INDIA LTD., IS WHOLLY OWNED SUBSIDIARY OF M/S . HYUNDAI MOTOR COMPANY LTD., SOUTH KOREA. THE ASSESSEE IS EN GAGED IN THE BUSINESS OF MANUFACTURING AND SELLING PASSENGER CARS IN DOMESTIC AND EXPORT MARKET. THE ASSESSEE COMPANY HA S FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2013-14 ON 28 TH NOVEMBER, 2013 ADMITTING TOTAL INCOME OF RS.1717,2 1,91,860/- UNDER NORMAL PROVISIONS OF THE ACT, AND BOOK PROFI T U/S.115JB OF THE ACT AT RS.2145,05,22,193/-. THE ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS AE S AND INTERNATIONAL TRANSACTIONS WERE DULY REPORTED IN FO RM 3CEB FILED IN ACCORDANCE WITH PROVISIONS OF INDIAN TRANS FER PRICING REGULATIONS CONTAINED IN SECTION 92, 92A TO 92F OF THE INCOME TAX ACT, 1961. THE CASE WAS TAKEN UP FOR SCRUTINY A ND DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A REFERENCE W AS MADE TO JCIT (TRANSFER PRICING) FOR DETERMINATION OF ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES. THE LEARNED TPO VIDE ITS ORDER DATED 31.10.2016 HAS SUG GESTED 7 ITA NO.3192/CHNY/2017 CERTAIN TRANSFER PRICING ADJUSTMENTS TOWARDS DOWNWA RD ADJUSTMENT TO THE VALUE OF IMPORTS AND UPWARD ADJUS TMENT FOR BRAND DEVELOPMENT SERVICES. 5. THE ASSESSING OFFICER, IN PURSUANT TO DIRECTIONS OF THE LD. TPO, HAS PASSED DRAFT ASSESSMENT ORDER U/S.143(3) R .W.S 144C(1) OF THE INCOME TAX ACT, 1961 ON 30.12.2016 A ND MADE TRANSFER PRICING ADJUSTMENTS AS SUGGESTED BY THE TP O AT RS.179,07,77,331/-. THE ASSESSING OFFICER HAD ALSO PROPOSED CERTAIN CORPORATE TAX ADJUSTMENTS INCLUDING DISALLO WANCES U/S.14A, R.W.R 8D OF IT RULES, 1962, DISALLOWANCE O F SUBSIDY RECEIVED TOWARDS CAPITAL EXPENDITURE, DISALLOWANCE OF FOCUS MARKETING SCHEME EXPENSES, AND DISALLOWANCE OF BON US / PERFORMANCE REWARD U/S.43B(C) OF THE INCOME TAX ACT , 1961. THE ASSESSEE HAS FILED OBJECTIONS BEFORE LEARNED DR P AGAINST DRAFT ASSESSMENT ORDER, BUT THE LEARNED DRP VIDE IT S DIRECTIONS DATED 16.09.2017 HAS REJECTED OBJECTIONS FILED BY T HE ASSESSEE. THE ASSESSING OFFICER IN PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP HAS PASSED FINAL ASSESSMENT ORDER INCOR PORATING 8 ITA NO.3192/CHNY/2017 DIRECTIONS OF THE LD. DRP. AGGRIEVED, THE ASSESSEE HAS FILED PRESENT APPEAL BEFORE THE TRIBUNAL. 6. GROUND NO.1 FILED BY THE ASSESSEE IS GENERAL IN NATURE AND DOES NOT REQUIRE SPECIFIC ADJUDICATION AND HENC E, THE SAME IS DISMISSED. 7. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATIO N FROM GROUND NO.2 OF ASSESSEE APPEAL IS DISALLOWANCES U/S .14A R.W.R 8D OF INCOME TAX RULES, 1962, AMOUNTING TO RS.86,54 ,491/-. THE FACTS WITH REGARD TO IMPUGNED DISPUTE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS EARNED D IVIDEND INCOME FROM MUTUAL FUNDS, WHICH IS EXEMPT FROM TA X AMOUNTING TO RS.57,826/-, HOWEVER, DID NOT MADE ANY SUO-MOTU DISALLOWANCE OF EXPENDITURE RELATABLE TO EXEMPT INC OME. THEREFORE, THE ASSESSING OFFICER HAS INVOKED PROV ISIONS OF RULE 8D OF INCOME TAX RULES, 1962, AND DETERMINED DISALLOWANCES OF RS.86,54,491/- U/S.14A OF INCOME T AX ACT, 1961. 9 ITA NO.3192/CHNY/2017 8. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT THE LEARNED DRP HAS ERRED IN SUSTAINING ADDITIONS MADE BY THE ASSESSING OFFICER TOWARDS DISALLOWANCE U/S.14A, WIT HOUT APPRECIATING FACT THAT DISALLOWANCES CONTEMPLATED U/S.14A CANNOT EXCEED AMOUNT OF EXEMPT INCOME. IN THIS CAS E, EXEMPT INCOME FOR IMPUGNED ASST. YEAR IS RS.57,826/-, WHER EAS THE ASSESSING OFFICER HAS DETERMINED DISALLOWANCE U/S.1 4A AT RS.86,54,491/- . IN THIS REGARD, HE RELIED UPON DEC ISION OF THE HONBLE SUPREME COURT IN THE CASE OF PR.CIT VS STAT E BANK OF PATIALA, 99 TAXMANN.COM 286. 9. THE LEARNED DR, ON THE OTHER HAND, SUPPORTING OR DER OF LEARNED DRP SUBMITTED THAT ALTHOUGH, THE ASSESSEE H AS EARNED EXEMPT INCOME, BUT COULD NOT MADE SUO-MOTU DISALLOW ANCE OF EXPENSES RELATABLE TO EXEMPT INCOME U/S.14A OF THE ACT. THEREFORE, THE ASSESSING OFFICER HAS INVOKED RULE 8 D OF INCOME TAX RULES, 1962 AND DETERMINED DISALLOWANCE AND HENCE, THERE IS NO MERIT IN THE ARGUMENTS OF THE AS SESSEE THAT DISALLOWANCE U/S.14A CANNOT EXCEED AMOUNT OF EXEMPT INCOME. 10 ITA NO.3192/CHNY/2017 10. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIA LS AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW. IT IS WELL SETTLED PRINCIPLES OF LAW THAT DI SALLOWANCES U/S.14A CANNOT EXCEED AMOUNT OF EXEMPT INCOME. THE HONBLE SUPREME COURT IN THE CASE OF PR.CIT VS STATE BANK O F PATIALA (SUPRA), WHILE DISMISSING SLP FILED BY THE REVENUE AGAINST ORDER OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PR.CIT VS STATE BANK OF PATIALA, HELD THAT DISAL LOWANCE U/S.14A COULD BE RESTRICTED TO AMOUNT OF EXEMPT INC OME ONLY. THE HONBLE JURISDICTIONAL HIGH COURT OF MADRAS IN THE CASE OF MARG LTD VS.CIT (2020) 120 TAXMANN.COM 84, HAS TAKE N A SIMILAR VIEW AND HELD THAT DISALLOWANCES UNDER RULE 8D R.W.S 14A CAN NEVER EXCEED EXEMPT INCOME EARNED BY THE AS SESSEE DURING PARTICULAR ASSESSMENT YEAR. IN THIS CASE, AD MITTEDLY, EXEMPT INCOME FOR IMPUGNED ASSESSMENT YEAR WAS RS.5 7,826/- , WHEREAS THE ASSESSING OFFICER HAS DETERMINED DISA LLOWANCE U/S.14A AT RS.86,54,491/- CONTRARY TO SETTLED PRINC IPLE OF LAW. THEREFORE, CONSIDERING FACTS AND CIRCUMSTANCES OF T HIS CASE AND ALSO BY FOLLOWING THE DECISIONS OF HONBLE SUPREME COURT AND HONBLE MADRAS HIGH COURT, WE DIRECT THE ASSESSING OFFICER TO 11 ITA NO.3192/CHNY/2017 RESTRICT DISALLOWANCES U/S.14A TO THE EXTENT OF EXE MPT INCOME EARNED FOR THE IMPUGNED ASSESSMENT YEAR. 11. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND NO.3 OF ASSESSEE APPEAL IS DISALLOWANCE OF D EPRECIATION ON CAPITAL SUBSIDY. DURING THE FINANCIAL YEAR 2001- 02, THE STATE INDUSTRIAL PROMOTION CORPORATION OF TAMIL NADU (SIP COT) HAD GRANTED SUBSIDIARY OF RS.100 LAKHS TO ENCOURAGE AND RECOGNIZE HUGE INVESTMENTS MADE FOR SETTING UP OF MEGA PROJEC T VIZ., PASSENGER CAR MANUFACTURING UNIT IN IRUNGATTUKOTTAI . THE ASSESSEE HAS TREATED SUBSIDY RECEIVED FROM SIPCOT A S CAPITAL RECEIPT AND DID NOT REDUCE THE SAME FROM COST OF AS SETS, AS IT WAS NOT DIRECTLY OR INDIRECTLY USED TO PURCHASE ANY ASSET. THE ASSESSING OFFICER HAS HELD THAT CAPITAL SUBSIDY REC EIVED FROM SIPCOT BEING UTILIZED BY THE ASSESSEE FOR CAPITAL E XPENDITURE, SAME OUGHT TO HAVE BEEN REDUCED FROM THE COST OF AS SET ADDED IN THAT YEAR BY CONTENDING THAT SUBSIDY WAS DIRECTL Y OR INDIRECTLY USED TO PURCHASE OF ASSET AND AS PER EXPLANATION (1 0) TO SECTION 43 THE SAME NEEDS TO BE DEDUCTED FROM COST OF ASSETS 12 ITA NO.3192/CHNY/2017 AND CONSEQUENTLY, REWORKED DEPRECIATION BY REDUCING AMOUNT OF SUBSIDIARY AND DISALLOWED A SUM OF RS.2,02,865/ -. 12. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECIS ION OF ITAT., CHENNAI, IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07, WHERE IT WAS HELD THAT SUBSIDIARY RECEIVED FROM SIP COT IS CAPITAL RECEIPT NOT LIABLE FOR TAX. 13. THE LEARNED DR, ON THE OTHER HAND, FAIRLY AGREE D THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE. 14. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATE RIAL ON RECORD, WE FIND THAT THE TRIBUNAL HAD CONSIDERED AN IDENTICAL ISSUE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2 006-07 IN IT(TP)A.NO.14/CHNY/2018 AND AFTER CONSIDERING NATUR E OF SUBSIDY HAS ALLOWED CLAIM OF THE ASSESSEE BY OBSERV ING THAT FOR EARLIER YEARS, THE CIT(A) HAS ALLOWED CLAIM OF THE ASSESSEE AND THE ASSESSING OFFICER HAS ACCEPTED DECISION OF THE CIT(A) AND DELETED ADDITIONS, WHILE PASSING ORDER GIVING EFFEC T TO THE ORDER 13 ITA NO.3192/CHNY/2017 OF THE CIT(A). THEREFORE, CONSISTENT WITH THE VIEW TAKEN BY THE COORDINATE BENCH, WE DIRECT THE ASSESSING OFFICER T O DELETE ADDITIONS MADE TOWARDS DISALLOWANCE OF DEPRECIATION ON CAPITAL SUBSIDY RECEIVED FROM SIPCOT. 15. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND NO.5 OF ASSESSEE APPEAL IS ADDITION TOWARDS VAT INCENTIVE RECEIVED FROM GOVERNMENT OF TAMIL NADU. D URING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS RECEIVED REFUND OF OUTPUT VAT AMOUNTING TO RS.32,75,60,000/- FROM GOV T. OF TAMIL NADU AND CREDITED TO PROFIT AND LOSS ACCOUNT UNDER THE HEAD INCOME FROM OTHER SOURCES. THE ASSESSEE HAS TR EATED ABOVE INCENTIVE AS REVENUE RECEIPT BOTH FOR ITS BOO KS OF ACCOUNT AND ITS TAX RETURNS. HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS RAISED A FRESH CLAIM TO TREAT INCENTIVE AS CAPITAL RECEIPTS NOT CHARGEABLE TO TAX . THE ASSESSING OFFICER HAS NOT ADJUDICATED FRESH CLAIM M ADE BY THE ASSESSEE. THE LEARNED DRP HAS REJECTED OBJECTIONS F ILED BY THE ASSESSEE WITHOUT GIVING ANY SPECIFIC DIRECTION. 14 ITA NO.3192/CHNY/2017 16. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS ALSO COVERED IN FAVOR OF THE ASSESSEE BY THE DEC ISION OF ITAT., CHENNAI IN ASSESSEES OWN CASE FOR ASSESSMEN T YEAR 2011-12, WHERE UNDER IDENTICAL CIRCUMSTANCES, THE TRIBUNAL HAS REMANDED THE MATTER TO THE FILE OF THE ASSESSIN G OFFICER TO CONSIDER ISSUE IN ACCORDANCE WITH LAW. 17. THE LEARNED DR, ON THE OTHER HAND, FAIRLY AGREE D THAT THIS ISSUE HAS BEEN SET ASIDE TO THE FILE OF ASSESSING O FFICER FOR EARLIER YEARS AND HENCE, THIS YEAR ALSO THE ISSUE M AY BE REMANDED BACK TO THE FILE OF ASSESSING OFFICER. 18. HAVING HEARD BOTH THE PARTIES AND CONSIDERED MA TERIAL ON RECORD, WE FIND THAT THE TRIBUNAL HAD CONSIDERED A N IDENTICAL ISSUE FOR ASSESSMENT YEAR 2011-12 IN ITA NO.853/CHN Y/2014, WHERE THE ISSUE HAS BEEN REMANDED BACK TO THE FILE OF ASSESSING OFFICER TO CONSIDER THE ISSUE DENOVO ON M ERITS IN ACCORDANCE WITH LAW. FACTS BEING IDENTICAL FOR THE YEAR UNDER CONSIDERATION BY FOLLOWING THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2011-12, WE SET 15 ITA NO.3192/CHNY/2017 ASIDE THE ISSUE TO FILE OF THE ASSESSING OFFICER AN D DIRECT HIM TO RECONSIDER THE ISSUE IN ACCORDANCE WITH LAW. 19. THE NEXT ISSUE THAT CAME UP FOR CONSIDERATION F ROM GROUND NO.4 OF ASSESSEE APPEAL IS DISALLOWANCE U/S. 43B(C) OF THE ACT, IN RESPECT OF PERFORMANCE INCENTIVE PAID T O EMPLOYEES. FACTS WITH REGARD TO IMPUGNED DISPUTE ARE THAT FOR THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2013-14, THE A SSESSEE HAS PAID PERFORMANCE REWARD TO EMPLOYEES IN THE CAD RE OF EXECUTIVES AND SENIOR EXECUTIVES. THE ASSESSEE HAS PROVIDED FOR EXPENSES FOR THE PERIOD BEGINNING FROM JANUARY TO MARCH, 2013. HOWEVER, PAYMENT WAS MADE ONLY AFTER DUE DATE OF FILING RETURN OF INCOME FOR ASSESSMENT YEAR 2013-14. THE A SSESSING OFFICER HAS DISALLOWED PERFORMANCE INCENTIVE PAID TO STAFF U/S.43B(C) R.W.S. 36(1)(II) OF THE ACT, AMOUNTING T O RS.13,01,51,983/- ON THE GROUND THAT AS PER SECTION 43B(C), ANY SUM REFERRED TO IN CLAUSE (II) OF SUB-SECTION (1) O F SECTION 36, SHALL NOT BE ALLOWED AS DEDUCTION, UNLESS THE SAME IS PAID ON OR BEFORE DUE DATE FOR FURNISHING RETURN OF INCOME U/S .139(1) OF THE ACT. THE ASSESSING OFFICER FURTHER NOTED THAT AS PE R SECTION 16 ITA NO.3192/CHNY/2017 36(1)(II), ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COMMISSION FOR SERVICES RENDERED, WHERE SUCH SUM WOULD NOT HAV E BEEN PAYABLE TO HIM AS PROFIT OR DIVIDEND, IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION IS COVERED. THEREFORE, HE OPINE D THAT ANY PAYMENT MADE TO AN EMPLOYEE WHICH IS IN THE NATURE OF BONUS OR COMMISSION FOR SERVICES RENDERED IS COVERED U/S. 36(1)(II) OF THE ACT, AND THUS, IF SUCH PAYMENT IS NOT MADE ON O R BEFORE DUE DATE OF FILING OF RETURN OF INCOME U/S.139(1) OF TH E ACT, THEN SAME CANNOT BE ALLOWED AS DEDUCTION, AS PER SECTION 43B(C) OF THE ACT. 20. THE ASSESSEE HAS FILED OBJECTIONS BEFORE LEARN ED DRP AND CHALLENGED ADDITIONS MADE BY THE ASSESSING OFFI CER. THE LEARNED DRP VIDE ITS DIRECTIONS DATED 16.09.2017 HAS REJECTED OBJECTIONS FILED BY THE ASSESSEE AND CONFIRMED ADDI TIONS MADE BY THE ASSESSING OFFICER. THE RELEVANT FINDINGS OF THE LD. DRP IS AS UNDER:- 7. GROUND OF OBJECTION 6 CONTENTIONS AGAINST DI SALLOWANCE OF BONUS/PERFORMANCE REWARD U/S 43B THE LEARNED AO ERRED IN DISALLOWING PERFORMANCE R EWARD AMOUNTING TO INR 13,01,51,983/- U/S.43B OF THE ACT. 17 ITA NO.3192/CHNY/2017 THE LD. AO OUGHT TO HAVE APPRECIATED THAT THE EXPEN DITURE INCURRED TOWARDS PERFORMANCE REWARD IS NOT IN THE NATURE OF BONUS AND THEREFORE THE PROVISIONS OF SECTION 43B (C) OF THE ACT IS NOT APPLICABLE. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO OUGHT TO HAVE APPRECIATED THAT THE ASSESSEE IS NOT COVERED BY THE PROVISIONS OF PAYMENT OF BONUS ACT, 1965 AND AS SUCH THE SAID EXP ENDITURE CANNOT BEDISALLOWED UNDER SECTION 43B R.W.S. 36(1) (II) OF THE ACT. WITHOUT PREJUDICE TO THE CLAIM THAT THE SAME SHOU LD NOT BE DISALLOWED, IT IS SUBMITTED THAT THE LD. AO HAS DIS ALLOWED THE ENTIRE EXPENDITURE OF PERFORMANCE REWARD ACCRUED DU RING YEAR INSTEAD OF THE AMOUNT PAID AFTER DUE DATE OF FILING RETURN OF INCOME. PANEL: THE AO FOUND THAT THE AMOUNT OF RS 13,01,51, 983 HAS BEEN DEBITED IN P&L ACCOUNT AS PERFORMANCE REWARD/B ONUS. BUT IT IS CERTIFIED IN AUDIT REPORT IN FORM 3CD THAT TH E AMOUNT REMAINED UNPAID. THE AO DISALLOWED THIS AMOUNT HOLD ING THAT SINCE THE AMOUNT HAS NOT BEEN PAID TILL THE DUE DAT E OF FILING RETURN OF INCOME, THE SAME CANNOT BE ALLOWED AS PER SECTION 43B. THE ASSESSEE CONTENDS THAT THE EXPENDITURE INC URRED IS TOWARDS PERFORMANCE REWARD AND NOT IN NATURE OF BON US. HENCE, PROVISIONS OF SECTION 43B ARE NOT APPLICABLE. THE ARGUMENTS OF THE ASSESSEE HAVE DULY BEEN CONSID ERED. SECTION 43B MANDATES THAT CERTAIN DEDUCTIONS ARE TO BE ALLOWED ONLY ON ACTUAL PAYMENT BASIS, EVEN THOUGH UNDER THE MERCANTILE SYSTEM OF ACCOUNTING INCOME AND OUT GO ARE ACCOUNTE D FOR ON THE BASIS OF ACCRUAL AND NOT ON THE BASIS OF ACTUAL DISBURSEMENTS OR RECEIPTS. THE SECTION, WHICH IS A NON-OBSTANTE P ROVISION, PROVIDES A CONDITION OF PAYMENT FOR THE DEDUCTION O F THE LIABILITIES SPECIFIED THEREIN, SO THAT THE DEDUCTION IS DEFERRE D TO THE YEAR OF PAYMENT. THE ONLY EXCEPTION IS THE YEAR IN WHICH TH E LIABILITY ACCRUES OR ARISES, FOR WHICH THE TIME FOR PAYMENT G ETS EXTENDED TO THE DUE DATE FOR FURNISHING THE RETURN OF INCOME FOR THAT YEAR. THIS NON-OBSTANTE SECTION MEANS THAT CERTAIN DEDUCT IONS EVEN IF ALLOWABLE AS PER THE PROVISIONS OF ANY OTHER SECTIO N OF THIS ACT WILL NOT BE ALLOWED UNLESS THE CONDITIONS OF SECTIO N 43B ARE SATISFIED. SECTION 43B(C) PROVIDES THAT ANY SUM REF ERRED TO IN 18 ITA NO.3192/CHNY/2017 SECTION 36( 1)(II) WILL NOT BE ALLOWED AS DEDUCTION UNLESS ACTUALLY PAID. SECTION 36(1)(II) READS AS UNDER: ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COMMISSION FOR SERVICES RENDERED WHERE SUCH SUM WOULD NOT HAVE B EEN PAYABLE TO HIM AS PROFITS OR DIVIDEND F IT HAD NOT BEEN PAID AS BONUS OR COMMISSION IT IS SEEN THAT THE PROVISION APPLIES FOR PAYMENT O F BONUS OR COMMISSION TO THE EMPLOYEES. THE ASSESSEE CLAIMS THAT THE EXPENDITURE INCURRED IS TOWARDS PERFORMANCE REWARD WHICH IS NOT IN THE NATURE OF BONUS AND HENCE, WILL NOT BE COVER ED IN SECTION 36(1) (II). THIS ARGUMENT OF THE ASSESSEE IS NOT CO RRECT. THE PAYMENT TO THE EMPLOYEES ON ACCOUNT OF PERFORMANCE OR PAYMENT AS COMMISSION IS IN THE SAME NATURE. IT IS IMMATERIAL IF THE ASSESSEE TERMS IT PERFORMANCE REWARD THIS SUM W OULD NOT HAVE BEEN PAID TO THE EMPLOYEES AS PROFITS OR DIVID END HAD IT NOT BEEN PAID AS COMMISSION L PERFORMANCE REWARD HENCE, THIS PANEL IS OF THE CONSIDERED OPINION THAT THE PROVISI ON OF SECTION 36(1)(II) IS SQUARELY APPLICABLE IN CASE OF THE ASS ESSEE AND CONSEQUENTLY THE MISCHIEF OF SECTION 43B WILL KICK IN TO DISALLOW THE CLAIM OF DEDUCTION BY THE ASSESSEE IT MAY ALSO BE MENTIONED THAT THE OBJECTION OF THE ASSESSEE ON IDENTICAL ISS UE FOR AY 2011- 12 AND 2012-13 HAS NOT BEEN ACCEPTED BY THE DRP IN VIEW OF ABOVE THE OBJECTION OF THE ASSESSET. IS REJECTED. 21. THE LEARNED A.R FOR THE ASSESSEE SUBMITTED THA T THE LEARNED DRP ERRED IN SUSTAINING ADDITIONS MADE BY T HE ASSESSING OFFICER TOWARDS DISALLOWANCE OF PERFORMA NCE INCENTIVE PAID TO EMPLOYEES U/S.43B(C) OF THE AC T, WITHOUT APPRECIATING FACT THAT SAID PAYMENT IS NEITHER BONU S NOR COMMISSION AND THUS, SAME CANNOT BE BROUGHT WITHIN THE AMBIT 19 ITA NO.3192/CHNY/2017 OF PROVISIONS OF SECTION 36(1)(II) R.W.S.43B(C) OF THE INCOME TAX ACT, 1961. IN THIS REGARD, HE RELIED UPON DECIS ION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF M/S.SHAN MUGAVEL MILLS LTD VS CIT 202 TAXMANN.COM 640 AND THE HONBL E DELHI HIGH COURT IN THE CASE OF SRIRAM PISTONS & RINGS LT D. VS. CIT 307 ITR 363. 22. THE LEARNED DR, ON THE OTHER HAND, STRONGLY SUPPORTING ORDERS OF ASSESSING OFFICER AS WELL AS LEARNED DR P SUBMITTED THAT MERELY FOR THE REASON THAT ASSESSEE HAS GIVEN DIFFERENT NOMENCLATURE TO A PARTICULAR EXPENSES, IT DOES NOT TAKE AWAY RIGHT OF THE REVENUE TO TREAT THE SAME WITHIN THE A MBIT OF RELEVANT PROVISIONS OF THE ACT. IN THIS CASE, THE A SSESSEE HAS PAID PERFORMANCE INCENTIVE TO STAFF, BECAUSE NONE O F ITS EMPLOYEES ARE COVERED UNDER BONUS ACT. BUT, FACT RE MAINS THAT PROVISIONS OF SECTION 36(1)(II) ALSO COVERS ANY S UM PAYABLE TO AN EMPLOYEE AS BONUS OR COMMISSION FOR SERVICES RE NDERED WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABLE TO HIM AS PROFITS OR DIVIDEND, IF IT HAD NOT BEEN PAID AS BONUS OR CO MMISSION. SINCE, THE ASSESSEE HAS PAID INCENTIVE FOR SERVICES RENDERED 20 ITA NO.3192/CHNY/2017 WHICH COVERED UNDER THE PROVISIONS OF SECTION 36(1) (II) AND THUS, IF THE SAME IS NOT PAID ON OR BEFORE DUE DAT E FOR FILING OF RETURN OF INCOME, THEN SAME CANNOT BE ALLOWED AS DE DUCTION U/S.43B(C) OF THE INCOME TAX ACT, 1961. 23. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIA LS AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW. ADMITTEDLY, NONE OF THE EMPLOYEES OF THE ASS ESSEE ARE COVERED UNDER PAYMENT OF BONUS ACT, BECAUSE ALL EMP LOYEES SALARY IS ABOVE THRESHOLD LIMIT FIXED UNDER PAYMENT OF BONUS ACT. IT IS ALSO AN ADMITTED FACT THAT THE ASSESSEE IS PAYING PERFORMANCE INCENTIVE/REWARD TO EMPLOYEES REGULARLY AND SUCH INCENTIVE HAS BEEN PAID FOR SERVICES RENDERED BY TH E EMPLOYEES. THEREFORE, IT IS NECESSARY TO EXAMINE PE RFORMANCE INCENTIVE PAID TO EMPLOYEES IN LIGHT OF PROVISIONS OF SECTION 36(1)(II) READ WITH SECTION 43B(C) OF THE INCOME TAX ACT, 1961. AS PER SECTION 36(1)(II) OF THE ACT, ANY SUM PAID T O AN EMPLOYEE AS BONUS OR COMMISSION FOR SERVICES RENDERED, WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABLE TO HIM AS PROFITS OR DI VIDEND, IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION IS ALLOWAB LE AS DEDUCTION. THE PROVISIONS OF SECTION 43B(C) PROVIDE S THAT ANY 21 ITA NO.3192/CHNY/2017 SUM REFERRED TO IN SECTION 36(1)(II) WILL NOT BE A LLOWED AS DEDUCTION, UNLESS ACTUALLY PAID. THEREFORE, FROM A COMBINED READING OF PROVISIONS OF SECTION 36(1)(II) READ WI TH SECTION 43B(C), IT IS SEEN THAT PROVISIONS OF SECTION 36(1) (II) IS NOT ONLY COVERS FOR PAYMENT OF BONUS TO STAFF, BUT IT ALSO A PPLIES TO COMMISSION PAID TO THE EMPLOYEES FOR SERVICES REN DERED. THE ASSESSEE CLAIMS THAT EXPENDITURE INCURRED IS TOWARD S PERFORMANCE REWARD, WHICH IS NOT IN THE NATURE OF B ONUS AND HENCE, WILL NOT BE COVERED U/S. 36(1)(II) OF THE AC T. 24. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO F ACTS BROUGHT OUT BY THE LD. AO IN LIGHT OF ARGUMENTS OF THE LD. AR FOR THE ASSESSEE AND WE DO NOT OURSELVES SUBSCRIBE TO T HE ARGUMENTS OF LD. AR FOR THE ASSESSEE, FOR SIMPLE RE ASON THAT ONCE PERFORMANCE INCENTIVE IS PAID FOR RENDERING SE RVICES, THEN SUCH PAYMENT IS IN THE NATURE OF BONUS OR COMMISSIO N WHICH COMES UNDER THE PROVISIONS OF SECTION 36(1(II) OF T HE ACT. IT IS IMMATERIAL WHETHER THE ASSESSEE TERMS IT AS PERFORM ANCE REWARD OR BONUS. BUT, WHAT IS RELEVANT IS NATURE O F PAYMENT AND PURPOSE OF PAYMENT. IN THIS CASE, IT IS IN THE NATURE OF 22 ITA NO.3192/CHNY/2017 BONUS OR COMMISSION AND SUCH PAYMENT IS FOR SERVICE S RENDERED BY EMPLOYEES. JUST BECAUSE NOMENCLATURE WA S CHANGED TO SOME OTHER NAME, A PARTICULAR EXPENDITUR E WOULD NOT CHANGE ITS ORIGINAL CHARACTER. IN THIS CASE, SU M WAS PAID TO EMPLOYEES FOR SERVICES RENDERED AND FURTHER, THIS S UM WOULD NOT HAVE BEEN PAID AS PROFITS OR DIVIDEND HAD IT NO T BEEN PAID AS COMMISSION OR PERFORMANCE REWARD. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT PROVISIONS OF SECTION 36(1)(I I) OF THE ACT IS SQUARELY APPLICABLE AND CONSEQUENTLY, MISCHIEF O F SECTION 43B(C) WOULD COME INTO PLAY, IF SUCH PAYMENT IS NOT MADE ON OR BEFORE DUE DATE OF FURNISHING OF RETURN OF INCOME. IN THIS CASE, ADMITTEDLY, THE ASSESSEE HAS PAID PERFORMANCE INCEN TIVE ONLY AFTER DUE DATE OF FILING OF INCOME-TAX RETURN. INSO FAR AS CASE LAWS RELIED UPON BY THE ASSESSEE, WE FIND THAT FACT S THOSE CASE LAWS ARE DIFFERENT FROM FACTS OF PRESENT CASE AND H AS NO APPLICATION TO CASE OF THE ASSESSEE. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO ERROR IN THE REASO NS GIVEN BY THE ASSESSING OFFICER AS WELL AS LEARNED DRP TO DIS ALLOW PERFORMANCE REWARD U/S.43B(C) OF THE ACT. HENCE, WE ARE INCLINED TO UPHOLD THE ORDER OF ASSESSING OFFICER A S WELL AS 23 ITA NO.3192/CHNY/2017 DIRECTIONS OF LEARNED DRP AND REJECT GROUND TAKEN B Y THE ASSESSEE. 25. THE NEXT ISSUE THAT CAME UP FOR CONSIDERATION F ROM GROUND NO.7 OF ASSESSEE APPEAL IS TRANSFER PRICING ADJUSTMENT MADE TOWARDS BRAND DEVELOPMENT SERVICES. DURING THE YEAR UNDER CONSIDERATION, THE LEARNED TPO HAS MADE UPWAR D ADJUSTMENT OF RS.76,99,17,331/- IN RELATION TO BRAN D FEES RECEIVABLE FROM ITS AES TOWARDS ENHANCEMENT OF BR AND VALUE OF ASSESSEE PARENT COMPANY. THE LEARNED TPO USED SPEARMANS RANK CORRELATION METHOD TO CONCLUDE THAT THERE IS POSITIVE CORRELATION BETWEEN THE BRAND VALUE OF HYU NDAI MOTOR INDIA LIMITED AND MARKET CAPITALIZATION OF HYUNDAI MARKET CORPORATION, SOUTH KOREA. THEREFORE, BY APPLYING SP EARMANS RANK CORRELATION METHOD, THE LD. TPO HAS COMPUTED INCREMENTAL BRAND VALUE AND ATTRIBUTED A PORTION OF THE SAME TO THE ASSESSEEIN PROPORTIONATE TO ITS SALES. 26. THE LEARNED A.R SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT., CH ENNAI IN 24 ITA NO.3192/CHNY/2017 ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 TO 2011- 12 IN ITA NOS.853/CHNY/2014, 563/CHNY/2015, 842/CHN Y/2016, WHERE IT WAS HELD THAT ACCRETION OF BRAND VALUE AS A RESULT OF USE OF BRAND NAME OF FOREIGN AE UNDER TECHNOLOGY US E AGREEMENT, WHICH HAS BEEN ACCEPTED TO BE AN ARRANGE MENT AT AN ARMS LENGTH PRICE DOES NOT RESULT IN A SEPARAT E INTERNATIONAL TRANSACTION TO BE BENCHMARKED. FACTS FOR THE YEAR U NDER CONSIDERATION ARE SIMILAR TO FACTS ALREADY CONSIDER ED BY THE TRIBUNAL AND HENCE, ADDITIONS MADE BY THE ASSESSING OFFICER TOWARDS BRAND DEVELOPMENT SERVICES SHOULD BE DELETE D. 27. THE LEARNED DR, ON THE OTHER HAND, STRONGLY SUP PORTING ORDER OF THE TPO AS WELL AS LEARNED DRP SUBMITTED T HAT BECAUSE OF HUGE SPENDING ON ADVERTISEMENT AND BRAN D PROMOTION EXPENSES BY THE ASSESSEE, BRAND VALUE OF M/S. HYUNDAI MOTOR CORPORATION, SOUTH KOREA IS SUBSTANTI ALLY ENHANCED, WHICH IS EVIDENT FROM FACTS BROUGHT OUT B Y THE TPO THAT M/S. HYUNDAI MOTOR CORPORATION HAS BENEFITTED A LOT FROM THE ASSESSEE AND HENCE, THE LEARNED TPO HAS RIGHTLY USED SPEARMANS RANK CORRELATION METHOD TO CONCLUDE THA T THERE IS 25 ITA NO.3192/CHNY/2017 A POSITIVE CORRELATION BETWEEN THE BRAND VALUE AND MARKET CAPITALIZATION OF HMC, KOREA. THEREFORE, HE HAS ATT RIBUTED PORTION OF THE SAME TO THE ASSESSEE IN PROPORTIONAT E TO ITS SALES AND MADE TRANSFER PRICING ADJUSTMENT TOWARDS BRAND FEES RECEIVABLE FROM ITS AE ENTERPRISES. THE LEARNED DR FURTHER REFERRING TO SOME ARTICLE PUBLISHED IN WEBSITE SUBM ITTED THAT THE ASSESSEE HAS RENDERED VARIOUS SERVICES TO ENHANCE B RAND VALUE OF M/S. HYUNDAI MOTOR CORPORATION THROUGHOUT THE WORLD. ALTHOUGH, THERE IS NO DIRECT AGREEMENT BETWEEN THE ASSESSEE AND ITS PARENT COMPANY FOR DEVELOPMENT OF BRAND, BU T THERE IS INDIRECT ARRANGEMENT BETWEEN THE ASSESSEE AND ITS A ES WHICH RESULTED IN ENHANCEMENT OF GLOBAL BRAND VALUE OF HY UNDAI MOTOR CORPORATION, WHICH IS CLEARLY EVIDENT FROM DA TA PUBLISHED BY INTERBRAND, A PRIVATE AGENCY ON ITS WEBSITE, AS PER WHICH MARKET CAPITALIZATION OF HYUNDAI HAS GONE UP SUBSTA NTIALLY. THEREFORE, THERE IS NO ERROR IN REASONS GIVEN BY TH E TPO AS WELL AS LEARNED DRP TO SUSTAIN ADDITIONS MADE TOWARDS B RAND SERVICE FEES AND THEIR ORDERS SHOULD BE UPHELD. 26 ITA NO.3192/CHNY/2017 28. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIA L AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW. ADMITTEDLY, ADDITIONS MADE BY THE TPO TOWARD S BRAND DEVELOPMENT SERVICES IS RECURRING ISSUE, WHICH WAS SUBJECT MATTER OF DELIBERATIONS FROM THE TRIBUNAL RIGHT FRO M ASSESSMENT YEAR 2009-10 TO ASSESSMENT YEAR 2011-12. THE TRIBU NAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 T O 2011-12 HAD CONSIDERED AN IDENTICAL ISSUE AND HELD THAT I N ABSENCE OF MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MOR E AES FOR ALLOCATION, APPORTIONMENT OR CONTRIBUTION TO ANY COST OR EXPENSES FOR A BENEFIT, SERVICE OR FACILITY, IT C ANNOT BE HELD THAT THERE IS AN INTERNATIONAL TRANSACTION FOR BRAND DEV ELOPMENT. THE TRIBUNAL FURTHER HELD THAT INCREASE IN BRAND VA LUE DUE TO USE OF FOREIGN AES BRAND NAME IN HMILS PRODUCTS C ANNOT BE CONSIDERED AS PROVISION FOR SERVICES, AS PER INTERN ATIONAL TRANSACTION DEFINITION U/S.92B OF THE INCOME TAX AC T, 1961. THE TRIBUNAL FURTHER HELD THAT THE EXPRESSION BENEFIT AND SERVICE HAVE DIFFERENT CONNOTATIONS. A SERVICE HAS TO BE A CONSCIOUS ACTIVITY AND NOT A PASSIVE EXERCISE. NOT ALL BENEFI TS ARISE AS A RESULT OF SERVICES RENDERED BY SOMEONE AND FURTHER ALL SERVICES 27 ITA NO.3192/CHNY/2017 DO NOT RESULT IN BENEFITS TO THE OTHER PARTIES. FOR THE PURPOSE OF DEFINITION OF INTERNATIONAL TRANSACTION, IN INDIAN CONTEXT RENDERING OF SERVICE IS WHAT NEEDS TO BE CONSIDERED AND NOT BENEFITS. SINCE, THERE IS NO FORMAL AGREEMENT OR AR RANGEMENT BETWEEN THE ASSESSEE AND ITS AES FOR RENDERING OF S ERVICE IN THE ALLEGED BRAND PROMOTION ACTIVITY, THE ACCRETION IN GLOBAL BRAND VALUE OF ITS PARENT COMPANY CANNOT BE ATTRIBU TABLE TO THE ASSESSEE BY ADOPTING SOME THEORY. IN THIS CASE, FA CTS ARE IDENTICAL AND PARI MATERIA TO THE FACTS ALREADY CON SIDERED BY THE TRIBUNAL FOR EARLIER YEARS. THEREFORE, CONSISTENT W ITH A VIEW TAKEN BY THE COORDINATE BENCH IN ASSESSEES OWN CA SE FOR EARLIER ASSESSMENT YEARS, WE ARE OF THE CONSIDERED VIEW THAT THE LEARNED TPO AS WELL AS LEARNED DRP WERE ERRED I N MAKING TRANSFER PRICING ADJUSTMENTS TOWARDS BRAND SERVICES BY ADOPTING SPEARMANS RANK CORRELATION METHOD AND CONCLUDED TH AT THERE IS POSITIVE ACCRETION BETWEEN BRAND VALUE AND MARKE T CAPITALIZATION OF HMC KOREA AND HENCE, WE DIRECT TH E ASSESSING OFFICER/TPO TO DELETE TRANSFER PRICING AD JUSTMENT MADE TOWARDS BRAND DEVELOPMENT SERVICES. 28 ITA NO.3192/CHNY/2017 29. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERAT ION FROM ADDITIONAL GROUND NO.3 OF ASSESSEE APPEAL IS AMOUNT RECEIVED FROM FOCUS MARKET SCHEME TO BE TREATED AS CAPITAL I N NATURE AND EXCLUDE FROM TOTAL INCOME. FACTS WITH REGARD TO IMPUGNED DISPUTE ARE THAT GOVERNMENT OF INDIA WITH AN INTENTION TO PROMOTE EXPORTS TO CERTAIN REGIONS / C OUNTRIES INTRODUCED FOCUS MARKET SCHEME WHICH PROVIDES INCEN TIVE OF 2.5% OF FOB VALUE FOR EACH LICENSING YEAR COMMENCIN G FROM 1 ST APRIL, 2006. THE EXPORT OF PRODUCTS TO THOSE COUNTR IES WHICH ARE COVERED UNDER LIST OF COUNTRIES IN SCHEDULE 37C WOU LD BE ENTITLED FOR DUTY CREDIT SCRIP EQUIVALENT TO 2.5% O F FOB VALUE OF EXPORTS. DURING THE YEAR UNDER CONSIDERATION, THE A SSESSEE WAS ELIGIBLE FOR ABOVE SCHEME, AS IT MAKES EXPORT TO SP ECIFIED MARKETS. ACCORDINGLY, THE ASSESSEE HAS RECEIVED AN AMOUNT OF RS.150.57 CRORES AS INCENTIVE FROM GOVT. OF INDIA. THE LICENSE UNDER THE SCHEME WAS GIVEN ONLY FOR EXPORTS TO POTE NTIAL NEW MARKETS / SPECIFIED PRODUCTS AND NOT FOR ALL EXPORT S OR ALL PRODUCTS TO ALL MARKETS. THE ASSESSEE HAS TREATED A MOUNT RECEIVED UNDER FOCUS MARKET SCHEME AS REVENUE IN NA TURE AND HAS OFFERED TO TAX. BASED ON CERTAIN SUBSEQUENT DEC ISIONS, THE 29 ITA NO.3192/CHNY/2017 ASSESSEE HAS RAISED ADDITIONAL GROUND AND ARGUED TH AT SUBSIDY RECEIVED UNDER FOCUS MARKET SCHEME IS CAPITAL IN NA TURE AND NOT CHARGEABLE TO TAX. 30. THE LEARNED A.R FOR THE ASSESSEE SUBMITTED THAT THE CHARACTER OF RECEIPT HAS TO BE DETERMINED WITH RESP ECT TO PURPOSE FOR WHICH SUBSIDY IS GIVEN AND IN THE PRESE NT CASE, IF YOU CONSIDER THE PURPOSE FOR WHICH SUBSIDY WAS GIVE N, IT IS CLEARLY IN THE NATURE OF CAPITAL RECEIPTS, BECAUSE SAID SUBSIDY WAS GIVEN TO EXPLORE NEW MARKET ACROSS THE GLOBE. T HEREFORE, THE SAME IS IN THE NATURE OF CAPITAL RECEIPT AND NO T CHARGEABLE TO TAX. IN THIS REGARD, HE RELIED UPON THE DECISION OF ITAT CHENNAI, IN THE CASE OF EASTMAN EXPORTS GLOBAL CLOT HING PVT. LTD. IN ITA NO.47 & 48/CHNY/2016, WHERE THE ISSUE R ELATING TO TAXABILITY OF LICENSES RECEIVED UNDER FOCUS MARKET SCHEME WAS HELD TO BE CAPITAL IN NATURE. THE ASSESSEE HAS ALSO RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS PONNI SUGARS & CHEMICALS LTD., 306 ITR 392. 30 ITA NO.3192/CHNY/2017 31. THE LEARNED DR, ON THE OTHER HAND, STRONGLY SUP PORTING ORDERS OF LEARNED DRP SUBMITTED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF ITAT., CHEN NAI FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO.2157/CHNY/2007, W HERE THE ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE . H E FURTHER SUBMITTED THAT IF YOU GO THROUGH THE NATURE OF AMOU NT RECEIVED UNDER FOCUS MARKET SCHEME, IT WAS GIVEN FOR THE PUR POSE OF ENHANCEMENT OF PROFITABILITY OF THE ASSESSEE BY EXP LORING NEW MARKETS FOR WHICH THE ASSESSEE IS NOT REQUIRED TO S PEND ANY CAPITAL EXPENDITURE WHICH GIVES ENDURING BENEFIT. F URTHER, EXPENSES INCURRED BY THE ASSESSEE TO EXPLORE NEW M ARKET IS IN THE NATURE OF SALES PROMOTION EXPENSES REQUIRED TO BE INCURRED AFTER COMMENCEMENT OF PRODUCTION AND THUS, IT CANNOT BE AT ANY STRETCH OF IMAGINATION HELD AS CAPITAL IN NATURE TO EXCLUDE FROM TAX. MOREOVER, THE ASSESSEE ITSELF HA S OFFERED TO TAX THE SAME AS REVENUE IN NATURE AND HENCE, THERE IS NO MERIT IN THE ARGUMENTS OF THE ASSESSEE THAT SAID EXPENDIT URE IS CAPITAL IN NATURE. 31 ITA NO.3192/CHNY/2017 32. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIA L AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW. THE GOVERNMENT OF INDIA, MINISTRY OF COMMERC E AND INDUSTRY HAS COME OUT WITH FOREIGN TRADE POLICY FOR THE PERIOD 1 ST SEPTEMBER, 2004 TO 31.03.2009 AND AS PER THE SAID POLICY, IT HAS ANNOUNCED A SCHEME FOR EXPORTERS OF CERTAIN GOO DS TO CERTAIN REGIONS CALLED FOCUS MARKET SCHEME . AS PER SAID SCHEME, EXPORT OF PRODUCTS TO THOSE COUNTRIES WHICH ARE COVERED UNDER LIST OF COUNTRIES IN SCHEDULE 37C WOU LD BE ENTITLED FOR DUTY CREDIT SCRIP EQUIVALENT TO 2.5% O F FOB VALUE OF EXPORTS. THE ASSESSEE BEING ELIGIBLE EXPORTER HAD R ECEIVED LICENSES/DUTY CREDIT SCRIP/ MARKET LINKED FOCUS SCR IPS AMOUNTING TO RS.150.57 CRORES FOR THE YEAR UNDER CONSIDERATIO N. THE ASSESSEE HAS CONSIDERED AMOUNT RECEIVED UNDER FOCUS MARKET SCHEME AS REVENUE RECEIPT AND OFFERED TO TAX. HOWEV ER, BASED ON SOME SUBSEQUENT DECISIONS OF APPELLATE AUTHORITI ES HAS FILED AN ADDITIONAL CLAIM SEEKING EXCLUSION OF SAID RECEI PT FROM TAXATION ON THE GROUND THAT IT IS IN THE NATURE OF CAPITAL RECEIPT AND NOT EXIGIBLE FOR TAX. THEREFORE, IN ORDER TO UN DERSTAND WHETHER AMOUNT RECEIVED FROM FOCUS MARKET SCHEME IS 32 ITA NO.3192/CHNY/2017 REVENUE IN NATURE OR CAPITAL RECEIPT, WHICH IS EXEM PT FROM TAX, ONE HAS TO UNDERSTAND OBJECTIVES OF FOCUS MARKET SC HEME ANNOUNCED BY GOVT. OF INDIA. AS PER FOREIGN TRADE P OLICY DOCUMENT, THE OBJECTIVE OF THE SCHEME IS TO OFFSET HIGH FREIGHT COST AND OTHER DISABILITIES TO SELECT INTERNATIONAL MARKET WITH A VIEW TO ENHANCE OUR COMPETITIVENESS TO THESE COUNTR IES. ON THE BASIS OF OBJECTIVES OF THE SCHEME ALONE, IT CAN BE EASILY CONCLUDED THAT AMOUNTS RECEIVED UNDER THE SCHEME IS REVENUE IN NATURE, BECAUSE IT IS PRIMARILY FOCUSING TO RE DUCE COST OF OUR EXPORTERS TO COMPETE WITH OTHER EXPORT MARKETS TO T HESE REGIONS. HOWEVER, VARIOUS COURTS INCLUDING HON'BLE SUPREME COURT IN NUMBER OF CASES HAS EXAMINED NATURE OF SUB SIDY RECEIVED FROM GOVT. OF INDIA ON THE BASIS OF PURPOS E TEST AND HAS HELD CAPITAL OR REVENUE IN NATURE DEPENDING UPO N PURPOSES FOR WHICH SAID SUBSIDY WAS GIVEN. IN OUR CONSIDERED VIEW, THIS CONTROVERSY CAN BE RESOLVED IF WE APPLY TEST LAID DOWN IN THE JUDGEMENT OF HON'BLE SUPREME COURT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LTD. VS. CIT (228 ITR 253). THE IMPORTANCE OF JUDGEMENT OF HON'BLE SUPREME COURT IN THE ABOVE CASE LIES IN THE FACT THAT IT HAS DISCUSSED A ND ANALYZED 33 ITA NO.3192/CHNY/2017 THE ENTIRE CASE LAWS ON THE ISSUE AND IT HAS LAID D OWN BASIC TEST TO BE APPLIED IN JUDGING THE CHARACTER OF SUBSIDY. THAT TEST IS THE CHARACTER OF RECEIPT IN THE HANDS OF THE ASSESSEE H AS TO BE DETERMINED WITH RESPECT TO THE PURPOSE FOR WHICH TH E SUBSIDY IS GIVEN. IN OTHER WORDS, IN SUCH CASES, ONE HAS TO A PPLY PURPOSE FOR TEST. THE POINT OF TIME AT WHICH SUBSIDY PAID I S NOT RELEVANT. THE SOURCE IS IMMATERIAL. THE FORM OF SUBSIDY IS IM MATERIAL. 33. THEREFORE, IN THE LIGHT OF DECISION OF THE HON' BLE SUPREME COURT, IN THE CASE OF SAHNEY STEEL & PRESS WORKS LT D. VS. CIT(SUPRA), IF WE EXAMINE FACTS OF THE PRESENT CASE , WE ARE OF THE CONSIDERED VIEW THAT DUTY CREDIT SCRIPS RECEIVE D BY THE ASSESSEE FROM GOVT. OF INDIA FOR EXPORT OF CERTAIN GOODS TO SOME SPECIFIED REGIONS IS CERTAINLY IN THE NATURE O F REVENUE RECEIPT, BECAUSE WHICH IS PRIMARILY GIVEN TO OFFSE T HIGHER FREIGHT COST AND OTHER DISABILITIES TO SELECT INTERNATIONA L MARKETS, WITH A VIEW TO ENHANCE OUR EXPORT COMPETITIVENESS TO THESE COUNTRIES. WE FURTHER, ARE OF THE OPINION THAT THIS SUBSIDY WA S GIVEN BY WAY OF ASSISTANCE IN CARRYING ON OF TRADE OR BUSINE SS AND TO MEET RECURRING EXPENSES, BUT IT WAS NOT FOR ACQUIRI NG ANY CAPITAL 34 ITA NO.3192/CHNY/2017 ASSET. IT WAS NOT TO MEET PART OF THE COST TO MANUF ACTURING ACTIVITY. IT WAS NOT GRANTED FOR PRODUCTION OR BRIN GING INTO EXISTENCE ANY NEW ASSET. THE SUBSIDY WAS GIVEN YEAR AFTER YEAR ONLY AFTER SETTING UP OF INDUSTRY AND ONLY AFTER CO MMENCEMENT OF PRODUCTION AND THEREFORE, SUCH SUBSIDY COULD ONL Y BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON BUSINESS OF THE ASSESSEE. IT IS WELL SETTLED PRINCIPLES OF LAW THAT ANY SUBSIDY GIVEN FOR THE PURPOSE OF OFFSETTING PART OF COST OF SETTING UP OF NEW INDUSTRY, AS PER INDUSTRIAL POLICY OF VARIOUS S TATE GOVERNMENTS OR GOVT. OF INDIA IS CONSIDERED AS PART OF CAPITAL CONTRIBUTION AND CAPITAL IN NATURE, WHEREAS SUBSIDY GIVEN AFTER COMMENCEMENT OF PRODUCTION OF PRODUCTS AND FURTHER FOR ENHANCING PROFITABILITY OF THE ASSESSEE IS CERTAINL Y IN THE NATURE OF ASSISTANCE GIVEN FOR RUNNING OF BUSINESS OF THE ASSESSEE MORE PROFITABLE AND HENCE, IT IS DEFINITELY REVENUE IN NATURE. 34. IN THIS CASE, ON PERUSAL OF FACTS AVAILABLE ON RECORD INCLUDING FOREIGN TRADE POLICY OF GOVERNMENT OF IND IA, IT IS VERY CLEAR FROM DOCUMENTS THAT MAIN OBJECTIVE OF FOCUS M ARKET SCHEME IS TO OFFSET HIGH FREIGHT COST AND OTHER DIS ABILITIES OF 35 ITA NO.3192/CHNY/2017 EXPORTER TO SELECT INTERNATIONAL MARKET WITH A VIEW TO ENHANCE OUR EXPORT COMPETITIVENESS TO THESE COUNTRIES. THE EXPENDITURE INCURRED BY THE ASSESSEE UNDER THIS SCHEME FOR EXPL ORING NEW MARKET ACROSS THE GLOBE IS MAINLY FREIGHT COST AND OTHER RECURRING EXPENSES LIKE SALES PROMOTION EXPENSES, I NCLUDING MANPOWER COST OF STAFF EMPLOYED IN MARKETING DEPART MENT. THOSE EXPENSES ARE GENERALLY IN THE NATURE OF REVEN UE EXPENDITURE AND THUS, CAN BE CONSIDERED AS REVENUE EXPENDITURE. SINCE, THE ASSESSEE GOT DUTY CREDIT S CRIP BENEFIT TO OFFSET COST INCURRED FOR EXPLORING NEW MARKET IN CLUDING HIGHER FREIGHT COST AND FURTHER, SAID EXPENDITURE IS IN TH E NATURE OF REVENUE EXPENDITURE, THEN ANY SUBSIDY INCLUDING DUT Y CREDIT SCRIPS GIVEN BY GOVT. OF INDIA FOR SUCH PURPOSE IS DEFINITELY IN THE NATURE OF REVENUE RECEIPT. THUS, AT ANY STRETCH OF IMAGINATION, THE AMOUNT RECEIVED UNDER FOCUS MARKET SCHEME CANNOT BE CONSIDERED AS CAPITAL IN NATURE, WHICH IS GIVEN TO OFFSET COST OR PART OF COST OF ANY ASSET OR FACILIT Y CREATED BY THE ASSESSEE. MOREOVER, IN THIS CASE, THE ASSESSEE ITSE LF HAD CONSIDERED AMOUNT RECEIVED UNDER FOCUS MARKET SCHEM E AS REVENUE RECEIPTS AND OFFERED TO TAX, CONSIDERING NA TURE AND 36 ITA NO.3192/CHNY/2017 PURPOSE OF RECEIPT OF SUBSIDY FROM THE GOVT. OF IND IA. IT IS A WELL KNOWN FACT THAT THE ASSESSEE IS BEST JUDGE TO DECID E A PARTICULAR ITEM OF INCOME OR EXPENDITURE, BECAUSE I T IS WELL AWARE FACTS OF ITS CASE. IN THIS CASE, THE ASSESSEE , AFTER CONSIDERING NATURE AND PURPOSE OF AMOUNT RECEIVED U NDER FOCUS MARKET SCHEME, HAS VERY WELL CONSIDERED THE S AME AS REVENUE RECEIPT AND OFFERED TO TAX. THEREFORE, BASE D ON SOME JUDGEMENTS OF HIGHER FORUM MAKING A CLAIM FOR EXCLU DING SAID RECEIPT FROM TAX BY CLAIMING THAT IT IS IN THE NATU RE OF CAPITAL RECEIPT IS NOT CORRECT, UNLESS THE ASSESSEE DEMONST RATES THAT FACTS OF THOSE CASE LAWS CONSIDERED BY APPELLATE FO RUM AND FACTS OF ASSESSEES CASE ARE SIMILAR IN NATURE. AS REGARDS VARIOUS CASE LAWS RELIED UPON BY THE ASSESSEE INCLU DING THE DECISION OF ITAT., CHENNAI IN THE CASE OF EASTMAN E XPORTS GLOBAL CLOTHING PVT.LTD. IN ITA NO.47 & 48/CHNY/201 6, WE FIND THAT THE ITAT, CHENNAI BENCH IN ABOVE CASE HAS NOT APPRISED FACTS IN RIGHT PERSPECTIVE OF LAW AND HENCE, THE JU DGMENT OF CHENNAI BENCH IS NOT CONSIDERED. AS REGARDS DECISIO N OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF PR.CIT VS. NITIN SPINNERS LTD. IN INCOME TAX APPEAL NO.31 OF 2019, W E FIND THAT 37 ITA NO.3192/CHNY/2017 FACTS OF CASE BEFORE HONBLE HIGH COURT AND FACTS O F PRESENT CASE ARE DIFFERENT AND HENCE, SAME IS NOT CONSIDERE D. 35. IN THIS VIEW OF THE MATTER, AND CONSIDERING FA CTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT DUTY CREDIT SCRIPS RECEIVED FROM GOVT. OF INDIA UND ER FOCUS MARKET SCHEME IS REVENUE IN NATURE AND FURTHER, SAM E WAS GIVEN TO OFFSET HIGHER COST OF FREIGHT AND OTHER DI SABILITIES OF EXPORTERS TO BE MORE COMPETITIVE IN EXPORTS TO CERT AIN REGIONS. THUS, THE SAME CANNOT AT ANY STRETCH OF IMAGINATION BE CONSIDERED AS CAPITAL IN NATURE. HENCE, WE REJECT T HE GROUND TAKEN BY THE ASSESSEE. 36. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM ADDITIONAL GROUND NO.4 OF THE ASSESSEE IS DEDUCTION TOWARDS EDUCATION AND SECONDARY EDUCATION CESS U/S.37(1) OF THE ACT. THE LEARNED A.R FOR THE ASSESSEE SUBMITTED THAT TH IS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SESA GOA LTD. VS JCIT (2020) 423 ITR 426, WHERE THE HONBLE BOMB AY HIGH 38 ITA NO.3192/CHNY/2017 COURT AFTER CONSIDERING VARIOUS FACTS INCLUDING SE LECT COMMITTEE OF PARLIAMENT REPORT ON EXCLUSION OF W ORD CESS FROM THE WORD TAX HAS HELD THAT EDUCATION CESS A ND SECONDARY EDUCATION CESS IS AN EXPENDITURE DEDUCTIBLE U/S.37 (1) OF THE ACT. 37. THE LEARNED DR, ON THE OTHER HAND, STRONGLY OPP OSING ADDITIONAL GROUND FILED BY THE ASSESSEE SUBMITTED T HAT THE ASSESSEE HAS NOT MADE ANY CLAIM BY DEBITING CESS IN TO PROFIT & LOSS ACCOUNT AND HENCE, CLAIM OF THE ASSESSEE BY FI LING ADDITIONAL GROUND ON THE BASIS OF SUBSEQUENT DECISI ON OF THE COURT CANNOT BE ENTERTAINED. 38. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIA L AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE HONBLE BOMBAY HIGH COURT H AS CONSIDERED AN IDENTICAL ISSUE IN THE CASE OF SESA G OA LTD.(SUPRA) AND HELD THAT EDUCATION CESS & SECONDAR Y AND HIGHER EDUCATION CESS ARE LIABLE FOR DEDUCTION IN C OMPUTING INCOME CHARGEABLE UNDER HEAD OF PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF 39 ITA NO.3192/CHNY/2017 CHAMBAL FERTILIZERS & CHEMICALS LTD. VS. JCIT 107 TAXMANN.COM 484 HAS TAKEN A SIMILAR VIEW AND HELD T HAT EDUCATION CESS IS NOT DISALLOWABLE EXPENDITURE UNDE R THE PROVISIONS OF SECTION 40(A)(II) OF THE ACT. THEREF ORE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS MERIT IN THE ADDI TIONAL GROUNDS FILED BY THE ASSESSEE REQUESTING DEDUCTION FOR EDUC ATION CESS & SECONDARY AND HIGHER EDUCATION CESS, AS BUSINESS E XPENDITURE DEDUCTIBLE U/S.37(1) OF THE ACT. BUT, FACT REMAINS THAT ASSESSEE HAS TAKEN UP THIS ISSUE FOR THE FIRST TIME BY FILIN G ADDITIONAL GROUNDS AND THE ASSESSING OFFICER DOES NOT HAVE ANY OCCASION TO EXAMINE CLAIM OF THE ASSESSEE. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT ISSUE NEEDS TO GO BACK TO FILE OF THE ASSESSING OFFICER AND HENCE, WE SET ASIDE THE ISSUE TO FILE OF THE ASSESSING OFFICER AND DIRECT HIM TO RE-EXAMINE CLAIM OF THE ASSESSEE IN LIGHT OF OUR DISCUSSIONS GIVEN HEREIN A BOVE AND ALSO BY CONSIDERING RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT AND HONBLE RAJASTHAN HIGH COURT IN THE CASES CITED ABOVE. 39. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM GROUND NOS.8.1 TO 8.11 AND ADDITIONAL GROUND NOS.1 & 2 OF 40 ITA NO.3192/CHNY/2017 ASSESSEE APPEAL IS TRANSFER PRICE ADJUSTMENT MADE B Y THE AO TOWARDS INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. 40. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANU FACTURE AND SALE OF PASSENGER VEHICLES IN DOMESTIC AS WELL AS EXPORT MARKET. THE SOURCING, PURCHASING, MANUFACTURING AND WAREHOUSING FACILITY OF THE ASSESSEE IS COMMON FOR CARS MANUFACTURED FOR ALL GEOGRAPHIES. THE VARIOUS STAG ES INVOLVED IN THE MANUFACTURING PROCESS IS EXPLAINED BY THE AS SESSEE AS PER WHICH THE PROCESS UP TO THE STAGE OF TRIAL RUN AND PRE- DELIVERY INSPECTION IS COMMON FOR BOTH EXPORT AND D OMESTIC SALES. FURTHER, THE INPUTS FOR MANUFACTURE, SUCH A S IMPORT OF RAW MATERIALS, DOMESTIC PURCHASE OF RAW MATERIALS, SPARES, ETC., ARE ALSO COMMON FOR DOMESTIC AND EXPORT SALES. BAS ED ON THE FUNCTIONAL ANALYSIS OF PROCESS, IN THE TP DOCUMENTA TION, THE ASSESSEE HAS TESTED ITS INTERNATIONAL TRANSACTIONS WITH ITS AE AT ENTITY LEVEL BY APPLYING TRANSACTION NET MARGIN MET HOD (TNMM) AS THE MOST APPROPRIATE METHOD. THE ASSESSEE HAS S ELECTED 5 COMPANIES AS COMPARABLES AND ADOPTED OPERATING PROF IT BY SALES AS PROFIT LEVEL INDICATOR (PLI). THE ASSES SEES MARGIN 41 ITA NO.3192/CHNY/2017 WAS AT 6.04% ON SALES WHILE THE COMPARABLE COMPANIE S MARGIN WAS ARRIVED AT 4.46%. ACCORDINGLY, CLAIMS TH AT INTERNATIONAL TRANSACTIONS WERE CONSIDERED TO BE AT ARMS LENGTH PRICE. 41. DURING TRANSFER PRICING PROCEEDINGS, THE TPO DI D NOT ACCEPTED TP STUDY CONDUCTED BY THE ASSESSEE AT ENTI TY LEVEL BY APPLYING TNMM AS MOST APPROPRIATE METHOD AND ON THE BASIS OF SEGMENTAL FINANCIALS FURNISHED BY THE ASSESSEE, THE LD.TPO HAS CARVED OUT DOMESTIC SEGMENT (MANUFACTURING AND SPARES) ALONE AND BENCHMARKED IT WITH COMPARABLE COMPANIES SELECTED BY THE ASSESSEE IN THE TP DOCUMENTATION. THE LD.TP O HAS ALSO MADE ADJUSTMENT TO THE OPERATING MARGIN BY TREATING ROYALTY INCOME, VAT, INCENTIVE, COMMISSION/DISCOUNT RECEIVE D AND INSURANCE CLAIM AS NON-OPERATING REVENUE. THE LD.T PO HAD ALSO TREATED FOREX LOSS AS OPERATING EXPENDITURE FO R THE PURPOSE OF COMPUTING MARGIN. THUS, THE TPO HAS RECOMPUTED OPERATING MARGIN OF THE ASSESSEE AND HAS RE-CHARACTERIZED INT ERNATIONAL TRANSACTIONS OF THE ASSESSEE BY SEGREGATING DOMESTI C SALES SEGMENT AS A SEPARATE INTERNATIONAL TRANSACTION AND PROPOSED 42 ITA NO.3192/CHNY/2017 TP ADJUSTMENT OF RS.102,08,60,000/-. THE RELEVANT FINDINGS OF THE TPO ARE AS UNDER: 4. DETAILS OF INTERNATIONAL TRANSACTIONS: SL.NO. NATURE OF TRANSACTION AMOUNT (RS.) METHOD ADOPTED 1. IMPORT OF RAW MATERIALS, COMPONENTS AND SPARE PARTS 4,386,52,57,327 TNMM 2. EXPORT OF CARS AND CKD PARTS 3,957,92,82,233 3. PURCHASE OF CAPITAL GOODS 431,74,23,785 4. PAYMENT OF ROYALTY 400,69,67,522 5. PAYMENT OF TECHNICAL KNOW HOW FEES 27,41,50,000 6. SERVICE AVAILED 41,68,02,303 7. TRADE RECEIVABLE 558,02,61,746 8. TRADE PAYABLES 438,23,14,994 9. ADVANCE FROM CUSTOMERS 16,08,521 10. PAYMENT OF GUARANTEE FEE 1,05,56,244 OTHER METHOD 11. INTEREST INCOME 10,87,20,398 12. EXPORT OF SAMPLES 1,31,64,983 13. REIMBURSEMENT EXPENSES 96,04,66,596 14. RECOVERY OF EXPENSES 2,95,50,331 5. SPECIFIED DOMESTIC TRANSACTIONS: DIRECTORS SALARY RS.98.68 MILLION 6. MARGIN LEVEL ADJUSTMENT: 6.1 NEED FOR SEGMENTATION: THE ASSESSEE IS ENGAGED IN MANUFACTURING AND SELLIN G CARS IN INDIA AS WELL AS EXPORTING THEM TO ITS AES ABROAD. DURING THE FINANCIAL YEAR 2012-13, THE ASSESSEE AGGREGATED ALL THE INTERNATIONAL TRANSACTIONS AND BENCHMARKED THE SAME BY APPLYING TNMM USING THIRD PARTY COMPARABLE COMPANIE S. 43 ITA NO.3192/CHNY/2017 DURING THE COURSE OF T.P. ASSESSMENT PROCEEDINGS TH E ASSESSEE WAS CALLED UPON TO FURNISH SEGMENTAL RESUL TS SHOWING THE MARGINS FROM AE EXPORT SEGMENT AND DOME STIC SEGMENT SEPARATELY. THIS APPROACH WAS REQUIRED SINC E THE FAR PROFILE OF THESE TWO SEGMENTS WERE DIFFERENT. I T WAS OBSERVED THAT THE MARGINS FROM THESE TWO SEGMENTS A RE NOT REQUIRED TO BE THE SAME. THE SEGMENTAL FINANCIALS F URNISHED BY THE ASSESSEE CONFIRMED THE OBSERVATION AS MAY BE SEEN FROM THE TABLE BELOW: DESCRIPTION MARGIN ON REVENUE MARGIN ON COST DOMESTIC EXPORT DOMESTIC EXPORT VEHICLES 3.88 % 9.70 % 4.03 % 10.74 % SPARES 6.30 % 8.40 % 6.72 % 9.27 % CKD UNITS 14.38 % 9.04 % OTHERS 16.80 % 9.94 % TOTAL 3.88 % 6.04 % 4.04 % 6.43 % IN VIEW OF THE HUGE VARIATIONS BETWEEN THE PROFIT M ARGINS OF DOMESTIC SEGMENT AND EXPORT TO AE SEGMENT IN BOTH T HE CATEGORIES OF VEHICLES AND SPARES, AN ATTEMPT WAS M ADE TO COMPARE THE DOMESTIC MARGINS OF THE ASSESSEE ON A STANDALONE BASIS WITH REFERENCE TO THE MARGINS OF E XTERNAL COMPARABLES FOR THE FOLLOWING REASONS: THE TURNOVER OF THE DOMESTIC SEGMENT CONSISTED OF 3,83,611 OF CARS SOLD AS AGAINST ONLY 80,711 CARS S OLD IN THE AE SEGMENT. REVENUE WISE THE DOMESTIC SEGMENT CONTRIBUTED RS.1,69,885 MILLION WHEREAS EXPORT SEGMENT TURNOVER WAS ONLY RS.97,638 MILLION; BOTH THE SEGMENTS INVOLVED SUBSTANTIAL AE TRANSAC TIONS AFFECTING THE OPERATING COST 6.2 ASSESSEES OBJECTION TO SEGMENTAL TESTING: THE ASSESSEE QUESTIONED THE ABOVE APPROACH ON THE G ROUND THAT IT LACKS PURPOSE AND WISDOM. THE ASSESSEES CO NTENTION WAS THAT ONLY A PORTION OF THE IMPORTS ATTRIBUTABLE TO THE DOMESTIC SEGMENT IS BEING BENCHMARKED SEPARATELY AN D THEREFORE THIS APPROACH MAY NOT GIVE A COMPLETE PIC TURE OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS 44 ITA NO.3192/CHNY/2017 UNLESS AN ENTITY LEVEL APPROACH IS TAKEN. EXPORTS TO AE IS THE PREDOMINANT INTERNATIONAL TRANSACTION AND THIS ALONE CAN BE TESTED WITH THE THIRD PARTY MARGIN. 6.3 POSITION OF THIS OFFICE: THE CONTENTION OF THE ASSESSEE IS NOT CORRECT. THE PURPOSE OF DETERMINATION OF ARMS LENGTH PRICE IS TO ASCERT AIN THE TRANSACTIONS EMBEDDED UNDER EACH SEGMENT WHOSE FAR ANALYSIS IS DIFFERENT. IN THE REPLY THE ASSESSEE HA S ADMITTED THAT THE SAME MATERIAL IMPORTED FROM AES ARE UTILI ZED FOR BOTH DOMESTIC AND EXPORT SEGMENTS'. BUT THE ASSESSE E HAS NOT EXPLAINED AS TO WHY THERE ARE HUGE VARIATIONS B ETWEEN THE PROFIT MARGINS OF DOMESTIC AND EXPORT SEGMENTS. SINCE THE ASSESSEE FAILED TO FURNISH THE EXACT QUANTUM OF INTERNATIONAL TRANSACTIONS IN RELATION TO EACH SEGM ENT ON THE COST SIDE, THE AE TRANSACTIONS AFFECTING THE COST S IDE OF THE FINANCIALS ARE PROPORTIONATELY ALLOCATED AS DONE BY THE ASSESSEE IN THE SEGMENTAL RESULTS. THE SAME WOULD F ORM THE BASIS FOR GIVING A PARITY APPROACH WHILE DETERMININ G THE QUANTUM OF ADJUSTMENT. 6.4 COMPUTING THE PROFIT MARGIN OF THE DOMESTIC SEG MENT: 6,4.1 SHOW CAUSE NOTICE: WHILE COMPUTING THE OPERATING INCOME, THE ASSESSEE HAS TAKEN CERTAIN NON-OPERATING ITEMS ALSO. THEREFORE V IDE SHOW CAUSE NOTICE DATED 28-9-2016 THE ASSES SEE WAS CALLED UPON TO STATE ITS OBJECTIONS, IF ANY, TO EXC LUDE CERTAIN INCOMES WHICH ARE TAKEN AS OPERATING INCOME AND TO INCLUDE FOREX LOSS WHICH IS TAKEN AS NON-OPERATING. VIDE RE PLY DATED 11-10-2016 THE ASSESSEE RAISED ITS OBJECTIONS, WHIC H ARE DISCUSSED ITEM-WISE HEREUNDER: 6.4.2 . ROYALTY INCOME - RS.1116 MILLIONS: ASSESSEES CLAIM: IN AN EARLIER YEAR, THE ASSESSEE HAD TRANSFERRED IT S GENUINE PARTS DIVISION, WHICH IS AFTER SALES SERVICE PARTS, TO M/S. MOBIS INDIA LTD. APART FROM THE CONSIDERATION FOR T HE 45 ITA NO.3192/CHNY/2017 TRANSFER OF GENUINE PARTS. DIVISION, MOBIS INDIA AG REED TO PAY THE RUNNING ROYALTY CALCULATED AT A PERCENTAGE ON SALES OF GENUINE PARTS DIVISION. THE ASSESSEES CLAIM IS THAT ROYALTY RECEIVED HAS TO BE TREATED AS OPERATING REV ENUE SINCE THIS IS SIMILAR TO THE ROYALTY PAYMENT MADE TO AE F OR USE OF TECHNOLOGY AND USE OF TRADEMARKS, WHICH FORMS PART OF THE OPERATING COST WHILE COMPUTING THE MARGIN OF THE AS SESSEE. HENCE ASSESSEE CLAIMED THAT ROYALTY INCOME RECEIVED FROM MOBIS INDIA ALSO SHOULD FORM PART OF THE REVENUE. POSITION OF THIS OFFICE: MOBIS INDIA LTD. HAS CARVED OUT, AS PER REQUIREMENT OF AS 17, SEPARATE SEGMENTS SHOWING THE MARGINS FROM GENU INE PARTS DIVISION AND MANUFACTURING DIVISION SEPARATEL Y. IT IS AN ADMITTED POSITION THAT THE FUNCTIONS, ASSETS AND RI SK IN RELATION TO THESE TWO SEGMENTS ARE DIFFERENT. BESID ES, THE MARGINS ARE ALSO FOUND TO BE DIFFERENT. A PORTION O F THE PROFIT GENERATED FROM THE GENUINE PARTS DIVISION WH ICH IS CALCULATED AT FIXED PERCENTAGE ON TURNOVER IS PASSE D ON TO THE ASSESSEE AS RUNNING ROYALTY. AS SUCH, THIS INCO ME IS NOT GENERATED FROM THE REGULAR OPERATION OF THE ASSESSE E, NAMELY, MANUFACTURE AND MARKETING OF PASSENGER CARS . THIS INCOME IS ACTUALLY A PROFIT SHARE IN CONSIDERATION OF TRANSFER OF A PROFIT MAKING APPARATUS IN AN EARLIER YEAR. TH EREFORE ROYALTY INCOME, WHICH IS CLASSIFIED CORRECTLY AS O THER INCOME IN THE PROFIT AND LOSS ACCOUNT, IS TREATED AS NON- OPERATING IN NATURE. THIS TREATMENT IS ALSO IN TUNE WITH THE STAND TAKEN BY THIS OFFICE LAST YEAR 6.4.3 INCENTIVES FROM GOVERNMENT - RS.328 MILLION : ASSESSEES CLAIM: IT IS THE CLAIM OF THE ASSESSEE THAT VAT REFUND COL LECTED ON SALES WITHIN TAMILNADU AND PAID TO COMMERCIAL TAX DEPARTMENT SHOULD FORM PART OF THE OPERATING REVENU E. AS PER THE MOU WITH THE GOVT OF TAMILNADU DATED 22.01. 2008 UNDER ULTRA MEGA INTEGRATED AUTOMOBILES PROJECTS PO LICY, THE ASSESSEE IS ELIGIBLE TO, IN THE EVENT OF MAKING COMMITTED INVESTMENTS IN ELIGIBLE FIXED ASSETS (EFA), GET REF UND OF OUTPUT VALUE ADDED TAX COLLECTED ON SALES WITHIN TA MILNADU 46 ITA NO.3192/CHNY/2017 UP TO A CERTAIN TIME PERIOD. THIS INCENTIVE IS LINK ED TO THE CAPITAL INVESTMENT IN ELIGIBLE FIXED ASSETS, WHICH IS THE ELIGIBILITY CRITERIA FOR THE ASSESSEE TO SEEK THE I NCENTIVE. POSITION OF THIS OFFICE: IT IS MENTIONED IN THE NOTES FORMING PART OF THE FI NANCIAL STATEMENTS UNDER GOVERNMENT GRANTS AS UNDER: SUBSIDIES GIVEN BY THE GOVERNMENT WHICH ARE BASED ON THE PERFORMANCE OF THE COMPANY ARE RECOGNISED IN TH E PROFIT AND LOSS ACCOUNT IN THE YEAR OF PERFORMANCE/ ELIGIBILITY IN ACCORDANCE WITH THE RELATED SCHEME, AND WHEN THERE IS NO UNCERTAINTY IN RECEIVING THE INCENTIVES.' THIS IS ACTUALLY AN ENTRY IN THE BOOKS OF ACCOUNTS RECOGNISING THE REVENUE AND SUBJECT TO REALISATION AND REVERSAL IN THE LATER YEARS, IF NOT RECEIVED. WHEN THAT IS THE CASE, THE ASSESSEE'S CLAIM THAT IT WOULD CONSTITUTE REVENUE FROM OPERATIONS APPEARS LESS CONVINCING. BESIDES, T HE ASSESSEE HAS FAILED TO SUBSTANTIATE ITS PRICING TAK ING NOTE OF THE INCENTIVE FROM THE GOVERNMENT. IT IS ALSO CORRE CTLY CLASSIFIED IN THE FINANCIALS AS AN ITEM DISTINCT FR OM REVENUE FROM OPERATIONS AND SHOWN UNDER THE HEAD OTHER IN COME. SUCH A CLASSIFICATION CANNOT BE TREATED AS WITHOUT ANY MEANING. THEREFORE THE INCENTIVE INCOME IS TREATED AS NON- OPERATING IN NATURE. THIS TREATMENT IS ALSO IN TUNE WITH THE STAND TAKEN BY THIS OFFICE LAST YEAR. 6.4.4 COMMISSION / DISCOUNT RECEIVED- RS.73 MILLION: ASSESSEES CLAIM: THE ASSESSEE CLAIMS THAT IT RECEIVES DISCOUNT/COMMI SSION AS FOLLOWS: DISCOUNTS OFFERED BY SUPPLIERS AS A RESULT OF TIMELY/EARLY PAYMENT OF BILLS RAISED TOWARDS PURCHASE OF MATERIALS/COMPONENTS AMOUNT RECEIVED TOWARDS CAR FINANCE REFERRAL AND CAR INSURANCE REFERRAL POSITION OF THIS OFFICE: 47 ITA NO.3192/CHNY/2017 THE ABOVE ITEMS ARE CLASSIFIED AS OTHER INCOME' IN THE FINANCIALS. THEY ARISE AS A RESULT OF ACTIVITIES AF TER THE SALE OF THE CARS. THEREFORE THEY CANNOT PARTAKE THE CHARACT ER OF OPERATING REVENUE. INSURANCE REFERRAL INCOME IS TRE ATED ON PAR WITH THAT OF COMMISSION INCOME. DISCOUNT PARTAK ES THE CHARACTER OF INTEREST INCOME WHICH REPRESENTS THE D IFFERENCE BETWEEN CREDIT PRICE AS PER INVOICE AND THE ACTUAL AMOUNT PAID BEFORE THE PAYMENT BECAME DUE. THE ASSESSEES CLAIM THAT DISCOUNT RECEIVED FROM THE SUPPLIERS SHOULD BE EQUATED WITH THE DISCOUNTS PROVIDED TO CUSTOMERS AND DEALER S DOES NOT STAND TO REASON. IN VIEW OF THE ABOVE, INSURANC E REFERRAL COMMISSION AND DISCOUNT RECEIVED FROM SUPPLIERS ARE TREATED AS NON-OPERATING IN NATURE. THIS TREATMENT IS ALSO IN TUNE WITH THE STAND TAKEN BY THIS OFFICE LAST YEAR 6.4.5. INSURANCE INCOME - RS.36 MILLIONS: ASSESSEES CLAIM: THE ASSESSEE CONTENDED THAT THE ABOVE INCOME SHOULD BE CONSIDERED AS OPERATING REVENUE. THE ASSESSEE HAS T AKEN INSURANCE TO PROTECT AGAINST THE RISK OF LOSS/DAMAG E OF MANUFACTURED CARS AND PARTS. AS THE MAIN REVENUE GENERATING ACTIVITY FOR THE ASSESSEE IS MANUFACTURI NG OF CARS, IN THE EVENT OF ANY UNFORESEEN HAPPENINGS, ANY DAMA GE OR LOSS OF MANUFACTURED CARS OR PARTS, THE OPERATIONS OF THE ASSESSEE WILL BE DISRUPTED AND ANY MONETARY LOSS WI LL HAVE SERIOUS IMPACT ON THE BUSINESS OF THE ASSESSEE. HEN CE IT IS IMPERATIVE TO MITIGATE THE RISK OF SUCH LOSS AND AS A RESULT TO COVER THE LOSS, THE ASSESSEE HAS OPTED FOR THE INSU RANCE COVER. BASED ON THE ABOVE IT IS EVIDENT THAT INSURA NCE INCOME OF THE ASSESSEE PERTAINS TO COVER THE RISK O F ITS OPERATING BUSINESS AND THUS SHOULD BE CONSIDERED AS OPERATING ITEM AS IT DIRECTLY RELATES TO THE CORE B USINESS ACTIVITY OF THE ASSESSEE. POSITION OF THIS OFFICE: THE FOLLOWING BREAK-UP OF INSURANCE INCOME WAS FURN ISHED BY THE ASSESSEE:- NATURE AMOUNT REMARKS DOMESTIC CAR 317381 CLAIM RELATES TO DAMAGE/LOSS 48 ITA NO.3192/CHNY/2017 LOSS-CLAIM INSIDE FACTORY FOR BILLED DOMESTIC CARS EXPORT CAR LOSS-CLAIM 33613875 CLAIM RELATES TO DAMAGE/LOSS INSIDE FACTORY, IN TRANSIT, AT PORT FOR BILLED EXPORT CARS IMPACT DAMAGE 1956404 CLAIM RELATES TO DAMAGE/LOSS INSIDE FACTORY FOR UNBILLED CARS TOTAL 35887660 FROM THE ABOVE BREAK-UP, IT IS SEEN THAT THE BREAKU P OF DOMESTIC CAR LOSS CLAIM IS TO THE EXTENT OF RS.19,3 3,712 (RS.3,17,381 + RS.1616331 (COMPUTED, OUT OF 1956404 , IN PROPORTION TO THE DOMESTIC CARS SOLD) ONLY. THE IMP ACT OF THIS CLAIM ON THE MARGIN IS NEGLIGIBLE AND THEREFOR E IGNORED. 6.4.6 FOREIQN EXCHANGE LOSS RS.726.69 MILLION: ASSESSEES CLAIM: THE ASSESSEE HAS CLAIMED THAT FOREX GAIN AND LOSSES SHOULD BE TREATED AS NON-OPERATING IN NATURE. THE ASSESSEE HAD HUGE INTERNATIONAL TRANSACTIONS DENOMINATED IN FOREIGN C URRENCY AND THE EXPOSURE IS ADMITTEDLY NOT COVERED THROUGH HEDGING OR SWAP OR OTHER FORWARD CONTRACTS. THE ASSESSEE HA S DECIDED TO TAKE THE RISK OF VOLATILITY IN THE REPOR TING CURRENCY AND THE TRANSACTION CURRENCY. WHETHER THE FOREIGN EXCHANGE LOSS AS RECORDED IN THE BOOKS IS OPERATION AL IN NATURE OR NOT DEPENDS UPON THE POSITION TAKEN BY TH E ASSESSEE AND AS ADMITTED AS PART OF THE FOREIGN EXC HANGE RISK PROFILE SUBMITTED BY THE ASSESSEE IN THE TP STUDY. THE ASSESSEE HAS DECLARED THAT IT IS EXPOSED TO FOREIGN EXCHANGE FLUCTUATION RISK. ACCORDINGLY, IT SHOULD BE TREATED AS NON- OPERATING IN NATURE. THE ASSESSEE HAS RAISED TWO ADDITIONAL ISSUES IN CO NNECTION WITH FOREIGN EXCHANGE LOSS. 1. ERRONEOUS CONSIDERATION OF ENTIRE FOREX LOSS OF DOM ESTIC 49 ITA NO.3192/CHNY/2017 SEGMENT:- THE ASSESSEE CLAIMED THAT WHILE RE-COMPUTING THE MA RGIN OF HMIL, TPO HAD ERRONEOUSLY CONSIDERED THE TOTAL FORE IGN EXCHANGE LOSS OF RS.726.69 MILLION DISCLOSED IN THE P & L ACCOUNT ENTIRELY TOWARDS DOMESTIC SEGMENT INSTEAD O F ATTRIBUTING THE SAME TO BOTH DOMESTIC AND EXPORT SE GMENTS. THE AMOUNT ATTRIBUTABLE TO THE DOMESTIC SEGMENT SHO ULD ONLY BE CONSIDERED FOR ARRIVING AT THE OPERATING MA RGIN. THE ASSESSEE CLAIMED THAT IT IS ONLY RS.150.05 MILLION. POSITION OF THIS OFFICE: FOREX LOSS CHARGED TO THE PROFIT AND LOSS ACCOUNT I S RS.726.69 MILLION WHICH IS THE NET FIGURE. NORMALLY LOSS ARISES AS A RESULT OF THE ACCOUNTS PAYABLE RELATED TO THE REVENUE ITEMS. THE ASSESSEE HAS REVENUES IN FOREIGN EXCHANGE. IT IS COMMON KNOWLEDGE THAT IN THE EXPORT SEGMENT IN RELATION THE RECEIVABLES THERE WILL ALWA YS BE A GAIN ON REALISATION OF THE RECEIVABLES. THEREFORE, THE LOSS POSITION IS NET. IN THIS CONTEXT, WHAT WOULD BE OF RELEVANCE IS THE TPO HAS TREATED THE GAIN RIGHTLY AS PART OF EXPORT SEGMENT AND THE LOSS IN RELATION TO THE PAYABLES AS PART OF THE DOMESTIC SEGMENT IN THE ABSENCE OF THE EXACT QU ANTUM OF IMPORTED MATERIALS USED BY THE ASSESSEE. IN FACT , THE LOSS BEFORE NETTING THE GAIN SHOULD FORM PART OF THE OPE RATING COST OF THE DOMESTIC SEGMENT WHICH WOULD FURTHER RE DUCE THE MARGIN OF THE ASSESSEE. REGARDING THE CLAIM THA T THE ENTIRE LOSS HAS BEEN LOADED ON TO THE DOMESTIC SEGM ENT, IT IS FOR THE ASSESSEE TO COME OUT WITH THE NECESSARY.FOR EX PORTFOLIO LEDGER TO SUBSTANTIATE ITS CLAIM. THIS HA S NOT BEEN DONE. THEREFORE, THIS CLAIM IS NOT ACCEPTABLE. 2. FOREX LOSS ON ACCOUNT OF ECB TO BE TREATED AS NON OPERATINQ ASSESSEES CLAIM: WITHOUT PREJUDICE TO ITS CLAIM WITH REGARD TO THE T REATMENT OF ENTIRE FOREX LOSS, THE ASSESSEE CLAIMED THAT OUT OF THE TOTAL FOREX LOSS OF 726.69 MILLION, THE LOSS ON ACCOUNT O F ECB LOAN (CAPITAL IN NATURE) AMOUNTING TO RS. 516.36 MI LLION HAS 50 ITA NO.3192/CHNY/2017 TO BE ALLOWED AS NON-OPERATING IN NATURE. POSITION OF THIS OFFICE: THE ASSESSEE DID NOT FURNISH THE ENTIRE FOREX ACCOU NT PORTFOLIO SUBSTANTIATING THE LOSSES AND GAINS FROM TRANSACTIONS AND TRANSLATIONS IN RELATION TO REVENU E AND CAPITAL ITEMS. BESIDES, THE ASSESSEE HAS FAILED TO RECONCILE THE FIGURES OF FOREX LOSS AS PER CASH FLOW STATEMEN T AND THE FOREX LOSS ADDED BACK AS PART OF TOTAL INCOME. THE COMPUTATION SHOWS UNREALISED LOSS ON KOREAN EXIM LO AN IS RS.47.595 CRORES. IN THE ABSENCE OF THE NECESSARY D THIS CLAIM IS NOT ENTERTAINED. 6.4.7 ERRONEOUS COMPUTATION OF VALUE OF INTERNATIONAL TRACTIONS IN THE SHOW CAUSE NOTICE : ASSESSEES CLAIM: THE ASSESSEE CLAIMED THAT THE TECHNICAL KNOWHOW FEE S OF RS.274.15 MILLION HAS ACTUALLY BEEN CAPITALISED IN THE BOOKS AND THEREFORE IT WARRANTS SIMILAR TREATMENT AS HAS BEEN GIVEN TO ACQUISITION OF CAPITAL ASSETS. ONLY 10% OF RS.27 4.15 MILLION HAS TO BE TAKEN AS THE QUANTUM OF INTERNATI ONAL TRANSACTIONS PERTAINING TO BOTH DOMESTIC AND EXPORT SEGMENT. POSITION OF THIS OFFICE: THIS CONTENTION OF THE ASSESSEE WILL BE SUITABLY CO NSIDERED WHILE QUANTIFYING THE ADJUSTMENT. THE INTERNATIONAL TRANSACTION THAT WOULD BE RELEVANT FOR DOMESTIC SEG MENT WOULD BE TAKEN AT RS.30002 MILLION INSTEAD OF RS.30 155 MILLION. 6.4.8 COMPUTATION OF ADJUSTMENT IN THE DOMESTIC SE GMENT: THE ADJUSTMENT IS COMPUTED AS UNDER:- AMOUNT S NO PARTICULARS [FIG. IN MIO] REMARKS 1 OPERATING REVENUE [OR] 1,45,364.02 51 ITA NO.3192/CHNY/2017 2 OPERATING COST [OCJ 1,41,935.46 3 OPERATING PROFIT [OP] 3,428.56 (1-2) *I PLI - TESTED FARTY [OP/ORJ IN % 2.36% (3/1) 5 VALUE OF INTERNATIONAL TRANSACTION 30,002.00 6 PROPORTION OF INTERNATIONAL TRANSACTION TO OC IN % 21.14% (5/2) 7 ARMS LENGTH COMPARABLE MARGIN 5.68% 8 ARMS LENGTH PROFIT - AT ENTITY LEVEL 8,258.12 (1*7) 9 ARMS LENGTH COST - AT ENTITY LEVEL 1,37,105.89 (1-8) 10 ARM'S LENGTH COST - AFTER PARITY 28,981.14 (9*6) 11 TP ADJUSTMENT - AFTER PARITY 1,020.86 (5 - 10) A ARM'S LENGTH COST - AFTER PARITY 28,981 (10) B TRANSFER PRICE - VALUE OF INTERNATIONAL TRANSACTION 30,002 (5) C VARIATION 1,021 (B - A) D 3% OF TRANSFER PRICE 900 (3% OF B) E WHETHER VARIATION EXCEEDS 3% OF TRANSFER PRICE YES (IF C>D) F TP ADJUSTMENT - AFTER PARITY [FINAL] 1,021 ('C) THEREFORE, A DOWNWARD ADJUSTMENT OF RS.102,08,60,00 0/- IS PROPOSED TO THE ASSESSING OFFICER IN RESPECT O F THE AE TRANSACTIONS RELEVANT TO THE DOMESTIC SEGMENT OF MANUFACTURE OF CARS AND SPARES. 42. THE AO, IN PURSUANT TO TRANSFER PRICING ADJUSTM ENT, AS SUGGESTED BY THE TPO VIDE HIS ORDER DATED 31.10.201 6 HAS PASSED DRAFT ASSESSMENT ORDER U/S.143(3) R.W.S. 144 C(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) ON 30. 12.2016 AND PROPOSED TP ADJUSTMENT OF RS.102,08,60,000/- TOWARD S VALUE 52 ITA NO.3192/CHNY/2017 OF IMPORTS PERTAINS TO DOMESTIC SALES SEGMENT. THE ASSESSEE HAS FILED OBJECTION BEFORE THE DRP-2, BANGALORE AGA INST ORDER OF THE LD.AO AND CHALLENGED TP ADJUSTMENT SUGGESTED BY THE TPO IN RESPECT OF DOMESTIC CAR SALES SEGMENT ON STA NDALONE BASIS BY REJECTING THE TP STUDY CONDUCTED BY THE AS SESSEE AT ENTITY LEVEL BY APPLYING TNMM AS MOST APPROPRIATE M ETHOD. THE ASSESSEE HAD ALSO CHALLENGED RE-COMPUTATION OF OPER ATING MARGIN BY CONSIDERING CERTAIN NON-OPERATING INCOMES AS OPERATING INCOME INCLUDING ROYALTY RECEIVED FROM MO BIS LTD TOWARDS AFTER SALES SERVICE SEGMENT AND FOREX LOSSE S. 43. THE LD.DRP VIDE ITS DIRECTION DATED 16.09.2017 ISSUED U/S.144C (5) OF THE ACT, REJECTED CONTENTIONS RAISE D BY THE ASSESSEE ON RE-CHARACTERIZATION OF TP STUDY CONDUCT ED BY THE ASSESSEE BY SEGREGATING DOMESTIC CAR SALE SEGMENT O N STANDALONE BASIS, BY HOLDING THAT AS PER THE PROVIS IONS OF THE ACT, EACH CLASS OF TRANSACTIONS HAS TO BE EXAMINED HAVING REGARD TO THE ARMS LENGTH PRICE BY APPLYING MOST A PPROPRIATE METHOD. UNDER CUP METHOD, THE PRICE CHARGED IN AN UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSA CTIONS ARE 53 ITA NO.3192/CHNY/2017 RELEVANT. SIMILARLY, UNDER TNMM, THE PROFIT REALIZ ED BY AN INDEPENDENT ENTERPRISE FROM A COMPARABLE UNCONTROLL ED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS ARE RE LEVANT. THUS, THE ACT DOES NOT SAY THAT TNMM IS TO BE APPLI ED AT THE ENTERPRISE LEVEL AND ONCE TNMM IS APPLIED AT THE EN TERPRISE LEVEL, ALL INTERNATIONAL TRANSACTION ARE AT ARMS L ENGTH PRICE. AS THERE ARE INTERNATIONAL TRANSACTIONS PERTAINING TO THE DOMESTIC SEGMENT OF THE ASSESSEE, SEPARATE BENCHMARKING OF T HE SAME BY APPLYING MOST APPROPRIATE METHOD BY THE TPO CANN OT BE CONSIDERED AS INAPPROPRIATE. THE LD.DRP HAS ALSO TA KEN SUPPORT FROM SOME JUDICIAL PRECEDENTS AND ALSO OECD GUIDELINES TO COME TO THE CONCLUSION THAT ARMS LEN GTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION BY TRANSACTION B ASIS FOR ARRIVING AT MOST PRECISE APPROXIMATION OF FAIR MARK ET VALUE. 44. AS REGARDS RE-COMPUTATION OF OPERATING MARGIN B Y INCLUDING CERTAIN NON-OPERATING INCOME AS OPERATING IN NATURE LIKE ROYALTY INCOME, INSURANCE CLAIM AND FOREX LOSS ES, HAS REJECTED OBJECTIONS FILED BY THE ASSESSEE, ON THE G ROUND THAT FOREX LOSS IS ALWAYS AN OPERATING EXPENDITURE BECAU SE IT IS INEXTRICABLY LINKED WITH BUSINESS TRANSACTIONS OF T HE ASSESSEE 54 ITA NO.3192/CHNY/2017 AND HENCE, IT CANNOT BE CONSIDERED AS NON-OPERATING REVENUE. SIMILARLY, ROYALTY RECEIVED FROM MOBIS LTD., IS ALS O IN THE NATURE OF SHARING OF CERTAIN PROFIT FOR TRANSFERRING ITS AFTER SALES SERVICE BUSINESS TO ANOTHER ENTITY AND HENCE, IT CANNOT BE SAID THAT IT IS HAVING NEXUS WITH BUSINESS ACTIVITY OF THE ASSESSEE . THE LD.DRP HAS ALSO REJECTED CONTENTION OF THE ASSESSEE FOR SELECTING MULTIPLE YEAR DATA BY HOLDING THAT AS PER RULE 10B(4) IT IS MANDATORY TO USE ONLY CURRENT YEAR DATA. FUR THER, REVISED OECD GUIDELINES 2010 HAD ALSO DISCUSSED THE ISSUE O F USE OF MULTIPLE YEAR DATA. THE CRUX OF THESE GUIDELINES I S THAT MULTIPLE YEAR DATA NEEDS TO BE LOOKED AT WHEN THERE IS A COR RELATION BETWEEN THE ASSESSEES CIRCUMSTANCES AND THAT OF TH E COMPARABLES, DUE TO CERTAIN ECONOMIC CONDITIONS, OR IF THERE IS A DIFFERENCE DUE TO DIFFERENT BUSINESS OR PRODUCT CYC LES OR IF THE RESULTS OF SOME COMPARABLES OVER THE YEARS CAN LEAD TO DISCOVERY OF ANOMALIES RENDERING THEM INCOMPARABLE. HOWEVER, THE OECD ALSO CAUTIONS THAT, USE OF MULTIP LE YEAR DATA DOES NOT NECESSARILY IMPLY THE USE OF MULTIPLE YEAR AVERAGES. THE LD.DRP HAS ALSO TAKEN SUPPORT FROM V ARIOUS JUDICIAL PRECEDENTS TO SUPPORT ITS FINDINGS TO REJE CT OBJECTIONS 55 ITA NO.3192/CHNY/2017 FILED BY THE ASSESSEE. THE RELEVANT FINDINGS OF TH E DRP ARE AS UNDER: PANEL: THE ABOVE GROUNDS ARE RELATED AND HENCE THE Y ARE CONSIDERED TOGETHER. THE SUBMISSIONS OF THE ASSESSE E HAVE DULY BEEN CONSIDERED. IT IS SEEN THAT THE TP STUDY OF THE ASSESSEE IS REJECTED AFTER RECORDING REASONS. HENCE THE CONTENTION CANNOT BE ACCEPTED. ON ANALYSIS OF THE TP STUDY OF' THE ASSESSEE, THE T PO RECOGNIZED THE MARGINS OF THE ARMS LENGTH COMPARAB LES WITH MEAN MARGIN OF 5.68% COMPUTED BY THE ASSESSEE. FROM THE SEGMENTAL DATA FURNISHED BE THE ASSESSEE A S PART OF TP PROCEEDINGS, THE MARGIN ON COST FOR THE DOMESTIC SEGMENT- MANUFACTURE AND SALES OF VEHICLES IN DOMES TIC MARKET, WAS ARRIVED AT 2.36%. 1.1 IS OBSERVED THAT THE ASSESSEE HAS SUBMITTED ITS OBJECTIONS TO THE PROPOS ED ACTION OF TPO VIDE ITS WRITTEN REPLY. THE TPO HAS CONSIDER ED THESE CONTENTIONS WHILE CARRYING OUT THE COMPARABILITY EX ERCISE. THE TPO HAS DISCUSSED THE REASONS AND JUSTIFICATION FOR ACCEPTING /REJECTING THE CONTENTIONS OF THE ASSESSE E. HENCE, THE APPROACH OF THE TPO CANNOT BE FAULTED WITH. FURTHER, AS REGARDS THE SUBMISSIONS OF THE ASSESSEE ON BENCHMARKING OF DOMESTIC SEGMENT ON STANDALONE BASI S, IT LASS BEEN JUDICIALLY HELD THAT AS PER THE PROVISION S, EACH CLASS OF TRANSACTIONS HAS TO BE EXAMINED HAVING REG ARD TO THE ARMS LENGTH PRINCIPLE BY APPLYING THE MOST APPROPR IATE METHOD. UNDER CUP METHOD, THE PRICE CHARGED IN AN UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSA CTIONS ARE RELEVANT. SIMILARLY, UNDER TNMM, THE PROFIT REA LIZED BY AN INDEPENDENT ENTERPRISE FROM A COMPARABLE UNCONTR OLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS ARE RE LEVANT. THUS, THE .ACT DOES NOT SAY THAT TNMM IS TO BE APPL IED AT THE ENTERPRISE LEVEL AND ONCE TNMM IS APPLIED AT TH E ENTERPRISES LEVEL, ALL THE INTERNATIONAL TRANSACTIO N ARE AT ARMS LENGTH. AS THERE ARE INTERNATIONAL TRANSACTIO NS PERTAINING TO THE DOMESTIC SEGMENT OF THE ASSESSEE, SEPARATE BENCHMARKING OF THE SAME BY APPLYING MOST APPROPRIA TE 56 ITA NO.3192/CHNY/2017 METHOD BY THE TPO CANNOT BE CONSIDERED AS INAPPROPR IATE. HENCE, THE APPROACH OF THE TPO IS BOTH LOGICAL AND LEGAL. IT IS ALSO OBSERVED THAT THE APPROACH OF TPO GETS S UPPORT IN VARIOUS JUDICIAL DECISIONS. IN THE CASE OF DEVELOP MENT CONSULTANTS PVT. LTD., VS. DCIT, 115 PTJ 577, IT WA S HELD THAT ARMS LENGTH PRICE SHOULD BE DETERMINED ON A TRANSACTION BY TRANSACTION BASIS. IN THE CASE OF S TAR INDIA PVT. LTD. VS. ACIT, THE HONBLE MUMBAI ITAT HAS HEL D THAT ALP SHOULD BE DETERMINED WITH RESPECT TO THE FUNCTI ONS PERFORMED, ASSETS EMPLOYED, RISKS ASSUMED BY THE AS SESSEE BUT NOT ON A CONSOLIDATED BASIS. THE HONOURABLE IT AT IN CASE OF BOMBARDIER TRANSPORTATION INDIA PRIVATE LIM ITED, WHILE UPHOLDING THE ACTION OF THE TPO IN DISALLOWAN CE OF MANAGEMENT SERVICES, HELD THAT THE PAYMENT OF INTRA GROUP SERVICES TO AE IS A SEPARATE INTERNATIONAL TRANSACT ION INDEPENDENT OF FINANCIAL RESULTS AND CAPABLE OF VER IFICATION SEPARATELY. DECISION OF ITAT DELHI IN CASE OF BENE TTON INDIA PVT LTD ITA NO. 3829/DEL/2010 AND AZTEC SOFTW ARE LIMITED 107 ITS 141 ALSO ARE IN THE SIMILAR LINE. IT IS OBSERVED THAT THE OECD GUIDELINES ALSO REQUIR E THAT ARMS LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION BY TRANSACTION BASIS FOR ARRIVING AT TH E MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE. THE TPO HAS DISCUSSED VERY LOGICALLY THE ISSUES INVO1VED IN HIS ORDER GIVING COGENT REASONING ND JUSTIFICATION FOR HIS D ECISION. CONSIDERING ALL THE ASPECTS, AND FOR THE REASONS MENTIONED IN PRECEDING DISCUSSIONS, THE ACTION OF T PO IS UPHELD AND THE OBJECTION OF THE ASSESSEE IS REJECTE D. 10. GROUND OF OBJECTION 10 - CONTENTIONS ON THE OPE RATING AND NON-OPERATING NATURE OF CERTAIN INCOME AND EXPENS ES FOR THE PURPOSE OF COMPUTATION OF THE OPERATI NG MARGINS OF THE TESTED PARTY (APPLICANT) THE LD. TPO ERRED IN EXCLUDING CERTAIN ITEMS OF INCOME, WHICH ARE OPERATING IN NATURE WHILE 57 ITA NO.3192/CHNY/2017 COMPUTING THE OPERATING INCOME AND OPERATING PROFIT S AND ERRED IN INCLUDING CERTAIN ITEMS OF EXPENSE / LOSSES, WHICH ARE NOT OPERATING IN NATURE WHILE COMPUTING THE OPERATING COSTS AND OPERATING PROFITS . THE LD. TPO ERRED IN NOT CONSIDERING THE ROYALTY INCOME RECEIVED BY THE APPLICANT IN CONSIDERATION FOR THE LICENSE OF THE TRADEMARKS AND KNOW-HOW TRANSFERRED TO MOBIS IN RELATION TO THE DISTRIBUT ION OF AFTER SALES PRODUCTS, AS OPERATING WHILE COMPUTING THE OPERATING MARGINS OF THE TESTED PARTY. THE LD. TPO ERRED IN NOT CONSIDERING THE INCENTIVES RECEIVED FROM THE GOVERNMENT OF TAMIL NADU FOR ITS PHASE II INVESTMENTS UNDER ULTRA MEGA INTEGRA TED AUTOMOBILE PROJECTS WITHIN TAMIL NADU, AS OPERATING WHILE COMPUTING THE OPERATING MARGINS OF THE TESTED PARTY. THE LD. TPO ERRED IN NOT CONSIDERING THE INSURANCE INCOME, DISCOUNT RECEIVED FROM SUPPLIERS TOWARDS EARLY PAYMENT OF BILLS, AND COMMISSION RECEIVED TOWARDS CAR FINANCE REFERRALS AND CAR INSURANCE REFERRALS AS OPERATING WHILE COMPUTING THE OPERATIN G MARGINS OF THE TESTED PARTY. THE LD. TPO ERRED IN CONSIDERING FOREIGN EXCHANGE LOSS AS OPERATING WHILE COMPUTING THE OPERATING MARGINS OF THE TESTED PARTY. THE LD.TPO HAS CONSIDERED THE ECONOMIC ANALYSIS SUBMITTED BY THE APPLICANT, BUT HAD CONSIDERED SING LE YEAR MARGINS OF COMPARABLE COMPANIES, THEREBY IGNORING MULTIPLE YEAR DATA WHILE DETERMINING THE OPERATION MARGINS OF THE COMPARABLE COMPANIES. PANEL: IN ABOVE GROUNDS, THE ASSESSEE OBJECTS TO TH E ACTION OF THE AO TREATING ROYALTY INCOME, KNOW HOW, INCENT IVE RECEIVED FROM GOVERNMENT, DISCOUNT AND INSURANCE RE CEIVED 58 ITA NO.3192/CHNY/2017 AS NON-OPERATING WHILE COMPUTING THE OPERATING MARG IN OF THE ASSESSEE. THE ASSESSEE ALSO CONTENDS THAT THE TPO WAS NOT CORRECT TO CONSIDER FOREX LOSS AS OPERATING. F URTHER IT IS CONTENDED THAT MULTIPLE YEAR DATA OF THE COMPARABLE S SHOULD BE CONSIDERED. THE SUBMISSIONS OF THE ASSESSEE HAVE DULY BEEN CONS IDERED. IT IS OBSERVED THAT THE TPO HAS CONSIDERED THE CONT ENTIONS OF THE ASSESSEE RAISED BEFORE HIM ON ABOVE ISSUES O R ROYALTY INCOME, INCENTIVE RECEIVED FROM GOVERNMENT, DISCOUNT AND INSURANCE RECEIVED. THE TPO HAS DISCUSSED IN DE TAIL THE REASONS AND JUSTIFICATIONS FOR HIS ACTION AT PA GE 4-6 OF HIS ORDER. THIS PANEL HAS PERUSED THE SAME AND FIND S THE APPROACH OF THE TPO JUSTIFIABLE. IN RESPECT OF FOREX LOSS THE TPO HAS CONSIDERED ALL THE CONTENTIONS OF THE ASSESSEE INTO ACCOUNT AND ARRIVE D AT THE CONCLUSION THAT THE FOREX LOSS IS OPERATING. THIS PANEL IS IN AGREEMENT WITH THE TPO ORDER AND HENCE NO CHANGE IS CALLED FOR. AS REGARDS THE CONTENTION RELATING TO THE REJECTION OF MULTIPLE YEAR DATA BY THE TPO, WE NOTE THAT R ULE 10B(4) WHICH MAKES IT MANDATORY TO USE ONLY THE CURRENT FINANCIAL YEAR'S DATA. THE WORD USED IN THIS SECTI ON IS 'SHALL' IMPLYING THEREBY THAT NEITHER THE TAX PAYER NOR THE DEPARTMENT HAS ANY CHOICE REGARDING THE USE OF DATA PERTAINING TO THE FINANCIAL YEAR IN WHICH THE TAX P AYER HAS ENTERED INTO THE INTERNATIONAL TRANSACTIONS. THE P ROVISO TO RULE L0B(4) ALLOWS FOR USE OF EARLIER PERIOD DATA O NLY IF IT REVEALS CERTAIN FACTS WHICH LEAVE AN INFLUENCE ON T HE DETERMINATION OF TRANSFER PRICES OF THE TRANSACTION S BEING CORN)3A1 ED. THE IMPLICATION HERE IS THAT THE EARLI ER YEAR DATA IS IN ADDITION TO THE DATA PERTAINING TO THE R ELEVANT FINANCIAL YEAR. IN TERMS OF THE PROVISO, THE APPELL ANT HAS NOT BEEN ABLE TO DEMONSTRATE WITH EVIDENCE HOW THE DATA OF PAST YEARS INFLUENCED THE PRICE OF THE TRANSACTION. 59 ITA NO.3192/CHNY/2017 IT IS SEEN THAT THE REVISED OECD GUIDELINES 2010 HA VE DISCUSSED THE ISSUE OF USE OF MULTIPLE YEAR DATA. T HE CRUX OF THESE GUIDELINES IS THAT MULTIPLE YEAR DATA NEEDS T O BE LOOKED AT WHEN THERE IS A CORRELATION BETWEEN THE ASSESSEE 'S CIRCUMSTANCES AND THAT OF THE COMPARABLES, DUE TO C ERTAIN ECONOMIC CONDITIONS, OR IF THERE IS A DIFFERENCE DUE TO DIFFERENT BUSINESS OR PRODUCT CYCLES OR IF THE RESU LTS OF SOME COMPARABLES OVER THE YEARS CAN LEAD TO DISCOVERY OF ANOMALIES, RENDERING THEM INCOMPARABLE. HOWEVER, TH E OECD ALSO CAUTIONS THAT, 'USE OF MULTIPLE YEAR DATA DOES NOT NECESSARILY IMPLY THE USE OF MULTIPLE YEAR AVER AGES.' WITH REGARD TO THE JUDICIAL DECISIONS RELIED UPON B Y THE ASSESSEE, IT IS SEEN THAT THE HONBLE JURISDICTIONA L ITAT AS WELL AS NUMEROUS OTHER ITATS HAVE NOW PASSED A NUMB ER OF JUDICIAL PRONOUNCEMENTS SUPPORTING THE USE OF CU RRENT YEAR DATA ALONE FOR THE PURPOSE OF COMPARABILITY, I F THE SPECIAL CONDITIONS MENTIONED IN THE PROVISO ARE NOT CAPABLE OF BEING DEMONSTRATED BY THE ASSESSEE. SOME OF THE SE JUDICIAL DECISIONS ARE MENTIONED BELOW: HONEYWELL LTD. [2000-TIOL-104-ITAT-PUNE] AZTECH SOFTWARE TECHNOLOGY [294 ITR (AT) 32 (BANG) (SB)] CUSTOMER SERVICES INDIA (P) LTD [2009-TIOL-424-ITAT - DEL] SCHEEFENACKERMOTHERSON LTD. [2009-TIOL.-376-ITAT- DEL] GEODIS OVERSEAS (P) LTD. (2011-II-3'1-ITAT-DEL-TP) TNT INDIA PVT. LTD. (2011-TII-39-ITAT-BANG-TP) NGC NETWORK (INDIA) PVT. LTD. (2011-T II-45-ITAT- MUM-INTL) BIRLA SOFT LIMITED (2011-'1'1 I -70-ITAT-DEL-TP) HAWORTH (INDIA) PVT. LTD. (2011-TII-64-ITAT-DEL-TP) DELOITTE CONSULTING INDIA PVT LTD. (ITA NO. 60 ITA NO.3192/CHNY/2017 1082/HYD/2011) IN VIEW OF THE ABOVE DISCUSSION, THE ACTION OF THE TPO OF REJECTING THE USE OF MULTIPLE YEAR DATA IS CONSIDER ED TO BE TO BE JUSTIFIED AND THE OBJECTION RAISED BY THE ASS ESSEE IN THIS GROUND IS REJECTED. 45. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE L D.TPO / DRP HAS ERRED IN BENCHMARKING INTERNATIONAL TRANSAC TIONS BY SEGREGATING DOMESTIC CAR SALES SEGMENT ON STANDALON E BASIS WITHOUT APPRECIATING THE FACT THAT INTERNATIONAL TR ANSACTIONS THAT ARE CLOSELY LINKED ARE TO BE AGGREGATED AND BENCHMA RKED AND THEREFORE, ADJUSTMENT BASED ON SEGMENTED RESULTS IS NOT WARRANTED. THE LD.AR FURTHER SUBMITTED THAT THE LD .TPO HAS NOT BROUGHT ON RECORD ANY FUNCTIONAL DIFFERENCES BETWEE N TWO SEGMENTS, BUT ONLY ALLEGED THAT PROFIT OF TWO SEGME NTS ARE VARIED WITHOUT CONSIDERING THE FACT THAT THE ASSESS EE HAS TESTED ITS INTERNATIONAL TRANSACTIONS AT ENTITY LEVEL AND PROVED ITSELF AS A TESTED PARTY BY SELECTING 5 COMPARABLES OF SIMILAR NATURE WITH THEIR MARGIN AS PER WHICH, THE ASSESSEES OPERATING MARGIN IS MUCH HIGHER THAN THE COMPARABLE COMPANIES MARGIN. THE LD.AR FURTHER SUBMITTED THAT APPROACH OF THE LD.TPO IS ERRONEOUS AS HE HAS ARTIFICIALLY CARVES OUT A PORTI ON OF TOTAL INTERNATIONAL TRANSACTIONS WHICH IS APPORTIONED TO DOMESTIC CAR 61 ITA NO.3192/CHNY/2017 SALES SEGMENT, AT THE SAME TIME, FAILED TO TEST THE REMAINING PORTION OF THE SAME INTERNATIONAL TRANSACTIONS FOR ARMS LENGTH PRICE. THE LD.AR FURTHER SUBMITTED THAT THE LD.TPO WHILE SEGREGATING THE TRANSACTIONS INTO DOMESTIC SALES SE GMENT AND EXPORT SALES SEGMENT, HAS FAILED TO CONSIDER THE FA CT THAT COMPARABLES SELECTED BY THE ASSESSEE IN ITS TP DOCU MENTATION IS ALSO HAVING DOMESTIC SALES AS WELL AS EXPORT SAL ES SEGMENT AND THUS CHOOSING VERY SAME COMPARABLE SELECTED BY THE ASSESSEE FOR ENTITY WIDE BENCHMARKING IS INCORRECT. THE LD.AR REFERRING TO RULE 10A(D) OF INCOME TAX RULES, 1962 AND GUIDANCE NOTE ON REPORT UNDER SECTION 92E OF THE AC T, ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND ALSO OECD TRANSFER PRICING GUIDELINES 2010 AND UNIT ED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DE VELOPING COUNTRIES, SUBMITTED THAT WHERE THERE IS EXISTENCE OF CLOSELY LINKED TRANSACTIONS, THE SAME COULD BE CONSIDERED A S ONE COMPOSITE TRANSACTION AND FOR THIS PURPOSE, COMMON TRANSFER PRICING ANALYSIS NEEDS TO BE CARRIED OUT BY APPLYIN G MOST APPROPRIATE METHOD. IN THIS REGARD, HE HAS RELIED U PON THE 62 ITA NO.3192/CHNY/2017 DECISION OF ITAT IN THE CASE OF CUMMINS INDIA LTD., VS. DCIT, PUNE, 80 TAXMANN.COM 62. 46. AS REGARDS RE-COMPUTATION OF OPERATING MARGIN B Y CONSIDERING CERTAIN ITEMS IN THE PROFIT & LOSS ACCO UNT AS OPERATING / NON-OPERATING IN NATURE, THE LD.AR SUBM ITTED THAT THE AO HAS ERRED IN RE-COMPUTATION OF MARGIN BY CONSIDE RING ROYALTY INCOME FROM MOBIS AS NON-OPERATING INCOME. THE TPO HAS GROSSLY ERRED IN APPRECIATING THE FACT THAT ROY ALTY RECEIVED BY THE ASSESSEE FROM MOBIS IS INEXTRICABLY LINKED W ITH SALES MADE BY THE ASSESSEE, BECAUSE THE ASSESSEE WAS EARL IER GENERATING REVENUE FROM AFTER SALES SERVICE BUSINES S AND THE SAME HAS BEEN CONSIDERED AS OPERATING, WHEREAS FOR THE YEAR, THE TOTAL BUSINESS SEGMENT OF AFTER SALES SERVICES HAS BEEN TRANSFERRED TO MOBIS. FURTHER, MOBIS AGREED TO PAY A LICENSE FEE AT 8.5% ON DOMESTIC SALES VALUE, WHICH IS DIREC TLY LINKED TO EACH AND EVERY CAR SALES MADE BY THE ASSESSEE. THE LD.AR FURTHER SUBMITTED THAT THE TPO HAS CONSIDERED ROYAL TY PAID BY THE ASSESSEE TO ITS AES AS OPERATING COST WHEREAS RESULTING INCOME RECEIVED HAS BEEN TREATED AS NON-OPERATING R EVENUE, 63 ITA NO.3192/CHNY/2017 WITHOUT APPRECIATING THE FACT THAT BOTH ROYALTY PAY MENT AS WELL AS ROYALTY INCOME IS ARAISED OUT OF TRADEMARK AND K NOWN-HOW OBTAINED BY THE ASSESSEE FROM ITS PARENT HMC, KOREA VIDE TECHNOLOGY AND ROYALTY AGREEMENT DATED 1 ST JULY, 2006. WHEN ROYALTY EXPENSE IS CONSIDERED AS OPERATING EXPENSE, ROYALTY INCOME WHICH IS RELATED TO ROYALTY EXPENSE SHOULD A LSO BE GIVEN THE SAME TREATMENT. 47. AS REGARDS, COMMISSION / DISCOUNT INCOME, INCEN TIVE, INSURANCE INCOME, THE ASSESSEE HAS TREATED THESE IN COMES AS OPERATING IN NATURE, BECAUSE ALL ARE LINKED TO MAIN BUSINESS ACTIVITY OF THE ASSESSEE. THE TPO WITHOUT GIVING A NY REASONS HAS CHANGED NATURE OF INCOME AND RE-COMPUTED OPERAT ING MARGIN. AS REGARDS, FOREX LOSSES TO BE TREATED AS N ON-OPERATING EXPENDITURE, THE LD.AR SUBMITTED THAT THE ASSESSEE HAS CONSISTENCY CONSIDERED FOREIGN EXCHANGE GAIN OR LOS S AS NON- OPERATING ITEM FOR SEVERAL YEARS AND THE SAME HAS B EEN ACCEPTED BY THE DEPARTMENT. HOWEVER, FOR THE YEAR UNDER CONSIDERING, THE TPO HAS CONSIDERED FOREIGN EXCHANG E LOSS AS OPERATING WITHOUT FOLLOWING THE PRINCIPLES OF CONSI STENCY. FURTHER, SUBSTANTIAL PORTION OF THE FOREX LOSS IS A TTRIBUTABLE TO 64 ITA NO.3192/CHNY/2017 RESTATEMENT OF EXTERNAL COMMERCIAL BORROWING (ECB ), WHICH FORMS PART OF FINANCING ACTIVITY AND HENCE, IT WOUL D BE INCORRECT TO TREAT SAME AS PART OF OPERATING COST FOR BENCHMA RKING PURPOSE. THE LD.AR FURTHER REFERRING TO GROUND NOS. 8.10 AND 8.11 SUBMITTED THAT THE TPO HAS MADE PROPORTIONATE ADJUSTMENT ON THE BASIS OF INTERNATIONAL TRANSACTIO NS PERTAINING TO DOMESTIC CAR SALES SEGMENT, WHEREAS THE LD.DRP W ITHOUT PROVIDING AN OPPORTUNITY TO THE ASSESSEE, ENHANCED SAID ADJUSTMENT BY ADJUSTING SHORTFALL OF MARGINS TO ENT IRE COST WHICH PREDOMINANTLY CONSISTS OF THIRD PARTY COST. IT IS A WELL SETTLED PRINCIPLE OF LAW THAT TP ADJUSTMENT HAS TO BE COMPU TED ONLY IN RESPECT OF INTERNATIONAL TRANSACTIONS AND NOT AT AN ENTITY LEVEL, WHICH IS EVIDENT FROM THE FACT THAT AS PER THE PROV ISIONS OF SECTION 92(1) AND RULE 10B(1)(E), IT HAD SPECIFICAL LY REFERS TO ANY INCOME ARISING FROM INTERNATIONAL TRANSACTION S HALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. T HEREFORE, THE LD.DRP WITHOUT APPRECIATING RELEVANT PROVISIONS HAS ENHANCED TP ADJUSTMENT TO TOTAL COST, WHICH IS INCO RRECT. IN THIS REGARD, THE LD.AR RELIED UPON THE FOLLOWING JUDICIA L PRECEDENTS. 65 ITA NO.3192/CHNY/2017 1) HIGH COURT OF MADRAS IN ASSESSEES OWN FOR ASSES SMENT YEAR 2012-13 IN W.A. NO.1344 OF 2017. 2) ITAT, CHENNAI IN THE CASE OF DOOSAN POWER SYSTEM S INDIA PVT. LTD. IN IT(TP)A 83/CHNY/2018. 3) ITAT, CHENNAI IN THE CASE OF YONGSAN AUTOMOTIVE INDIA PVT. LTD IN ITA NO.357/MDS/2017 4) ITAT, CHENNAI IN THE CASE OF MOBIS INDIA LTD IN 38 TAXMANN.COM231 5) ITAT, CHENNAI IN THE CASE OF MISUBA SICAL INDIA PVT. LTD., IN ITA NO.400/CHNY/2017. 6) ITAT, MUMBAI IN THE CASE OF IOT DESIGN AND ENGIN EERING LTD., IN ITA NO. 4722/MUM/2016. 48. THE LD. DR, ON THE OTHER HAND, STRONGLY SUPPORT ING ORDER OF THE LD. DRP SUBMITTED THAT THERE IS NO ERROR IN RE- CHARACTERIZATION OF INTERNATIONAL TRANSACTIONS BY T HE TPO BY SEGREGATING DOMESTIC CAR SALES SEGMENT ON A STANDAL ONE BASIS, BECAUSE AS PER THE PROVISIONS OF THE ACT, ARMS LEN GTH PRICE NEEDS TO BE TESTED ON TRANSACTION BY TRANSACTION ME THOD HAVING REGARD TO THE NATURE OF TRANSACTIONS BY ADOPTING MO ST APPROPRIATE METHOD. FURTHER, ONCE AGGREGATE TRANSA CTION ARE 66 ITA NO.3192/CHNY/2017 TESTED BY ADOPTING TNMM AS MOST APPROPRIATE METHOD, THERE IS NO BAR TO TEST OTHER TRANSACTIONS OF ITS NATURE BY CONSIDERING MOST APPROPRIATE METHOD. THE TPO AS WELL AS THE LD .DRP HAS BROUGHT OUT VARIOUS REASONS TO SEGREGATE TRANSACTIO NS ON A STANDALONE BASIS AND HELD THAT THE ASSESSEE IS HAVI NG DIFFERENT MARGINS FROM DIFFERENT SEGMENTS AND HENCE, IT NEEDS TO BE SEPARATELY BENCHMARKED. THEREFORE, THERE IS NO ERR OR IN THE ORDERS OF THE TPO AS WELL AS THE LD.DRP. HE, FURTH ER SUBMITTED THAT AS REGARDS RE-COMPUTATION OF OPERATING MARGIN BY CONSIDERING CERTAIN OPERATING / NON-OPERATING INCOM E, THE TPO AS WELL AS THE LD.DRP HAS GIVEN VALID REASONS TO CO NSIDER ROYALTY INCOME, COMMISSION / DISCOUNT INCOME, INCEN TIVES AND INSURANCE AS NON-OPERATING, BECAUSE THOSE INCOMES A RE NOT RECURRING IN NATURE, WHICH ACCRUES TO THE ASSESSEE ON DAY TO DAY BASIS AND FURTHER, DERIVED FROM MAIN BUSINESS A CTIVITY OF THE ASSESSEE. AS REGARDS FOREIGN EXCHANGE LOSS, IT IS A WELL SETTLED PRINCIPLE OF LAW BY VARIOUS DECISIONS OF COURTS AND TRIBUNALS THAT FOREX LOSS IS ALSO REVENUE IN NATURE, WHICH IS OPERATING INCOME / EXPENSE, BECAUSE SAME ARISES OUT OF SALES OR PURCHASE TRANSACTION OF THE ASSESSEE OR OTHER CAPIT AL FINANCING 67 ITA NO.3192/CHNY/2017 ACTIVITIES. THEREFORE, FOREX LOSS / GAIN CANNOT BE CONSIDERED AS NON-OPERATING. THE TPO / LD.DRP HAVE GIVEN VALID R EASONS TO REJECT OBJECTION FILED BY THE ASSESSEE AND HENCE, T HEIR ORDERS SHOULD BE UPHELD. 49. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIA LS AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO CAREFULLY CONSIDERED VARIOUS C ASE LAWS CITED BY THE LD.AR FOR THE ASSESSEE. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF HYUNDAI MOTOR COMPANY, SOUTH KO REA. THE ASSESSEE IS ENGAGED IN MANUFACTURING AND SELLIN G CARS IN INDIA AND EXPORTING THEM TO AES ABROAD. THE ASSES SEE HAS ENTERED IN TO VARIOUS INTERNATIONAL TRANSACTIONS WI TH ITS AES AND CLAIMED IT AS TESTED PARTY AND BENCHMARKED THE SAME BY APPLYING TNMM AS MOST APPROPRIATE METHOD. THE TPO DID NOT ACCEPT TP STUDY CONDUCTED BY THE ASSESSEE AND ACCOR DING TO HIM, THERE IS HUGE VARIATION BETWEEN PROFIT MARGINS OF DOMESTIC SEGMENT AND EXPORT TO AE SEGMENT, IN BOTH CATEGORIE S OF VEHICLES AND SPARES. ACCORDINGLY, HE HAS REJECTED TP STUDY CONDUCTED BY THE ASSESSEE AND RE-CHARACTERIZED TP S TUDY BY SEGREGATING DOMESTIC CAR SALE SEGMENT ON A STANDALO NE BASIS 68 ITA NO.3192/CHNY/2017 AND MADE TP ADJUSTMENT. WE HAVE GIVEN OUR THOUGHTF UL CONSIDERATION TO THE REASONS GIVEN BY THE LD.TPO / DRP AND ARGUMENTS ADVANCED BY THE LD.AR FOR THE ASSESSEE AN D WE, OURSELVES DO NOT SUBSCRIBE TO THE ARGUMENTS ADVANCE D BY THE LD.AR FOR THE ASSESSEE FOR SEGREGATION OF DOMESTIC CAR SALE SEGMENT ON A STANDALONE BASIS FOR THE SIMPLE REASON THAT AS PER THE PROVISIONS OF THE ACT, EACH CLASS OF TRANSA CTIONS HAS TO BE EXAMINED HAVING REGARD TO THE ARMS LENGTH PRICE BY APPLYING MOST APPROPRIATE METHOD. UNDER CUP METHOD, THE PRICE CHARGED IN AN UNCONTROLLED TRANSACTION OR A N UMBER OF SUCH TRANSACTIONS ARE RELEVANT WHEREAS, UNDER TNMM, THE PROFIT REALIZED BY AN INDEPENDENT ENTERPRISE FROM A COMPAR ABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSA CTIONS ARE RELEVANT. THEREFORE, AS PER THE PROVISIONS OF THE ACT, IT DOES NOT SAY THAT ONCE, TNMM IS APPLIED AT THE ENTERPRISE LE VEL, ALL INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH PRIC E. SINCE, THERE ARE INTERNATIONAL TRANSACTIONS PERTAINING TO DOMEST IC SEGMENT, SEPARATE BENCHMARKING OF THE SAME BY APPLYING MOST APPROPRIATE METHOD BY THE TPO IS IN ACCORDANCE WITH LAW AND THUS, THE APPROACH OF THE TPO IN SEGREGATING DOMEST IC CAR SALE 69 ITA NO.3192/CHNY/2017 SEGMENT ON A STANDALONE BASIS IS BOTH LOGICAL AND L EGAL. WE, FURTHER NOTED THAT THE ASSESSEE IS HAVING DIFFERENT MARGINS FOR DIFFERENT SEGMENTS OF BUSINESS, AS PER WHICH, ITS M ARGIN FROM DOMESTIC CAR SALE SEGMENT IS 2.36% WHEREAS, ITS MAR GIN FROM EXPORT SALE SEGMENT IS 6.04%. FURTHER, REVENUE-WIS E DOMESTIC SEGMENT CONTRIBUTED MORE REVENUE, WHEN COMPARED TO EXPORT SEGMENT. BOTH SEGMENT INVOLVED SUBSTANTIAL AES TRA NSACTIONS AFFECTING OPERATING COST. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT SEPARATE BENCHMARKING OF TRANSACTIONS ON SEGMENT- WISE WAS IS VERY MUCH REQUIRED, BECAUSE THE FAR PRO FILE OF TWO SEGMENTS ARE DIFFERENT. WE, FURTHER, NOTED THAT OEC D GUIDELINES ALSO REQUIRE THAT ARMS LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION BY TRANSACTION BASIS FOR A RRIVING AT THE MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE. T HEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO ERROR I N REASONS GIVEN BY THE TPO TO SEGREGATE DOMESTIC CAR SALE SEG MENT ON A STANDALONE BASIS AND BENCHMARKED TRANSACTIONS OF TH E ASSESSEE WITH ITS AES. AS REGARDS, CASE LAWS RELI ED UPON BY THE LD.AR FOR THE ASSESSEE, WE FIND THAT THERE ARE DIVERGENT VIEWS ON THE ISSUE, WHERE SOME APPELLATE FORUMS HAV E HELD 70 ITA NO.3192/CHNY/2017 THAT INTERNATIONAL TRANSACTIONS THAT ARE CLOSELY LI NKED ARE TO BE AGGREGATED AND BENCHMARKED, WHEREAS SOME APPELLATE FORUMS HAD HELD THAT ARMS LENGTH PRICE SHOULD BE DETERMIN ED ON A TRANSACTION BY TRANSACTION BASIS, BASED ON FUNCTION S PERFORMED, ASSET EMPLOYED AND RISK ASSUMED BY THE ASSESSEE. FU RTHER, THE ACT IS VERY CLEAR, AS PER WHICH EACH INTERNATIO NAL TRANSACTION HAS TO BE BENCHMARKED BASED ON THE NATURE OF TRANSA CTIONS BY APPLYING MOST APPROPRIATE METHOD. THERE IS NO COMMO N RULE FOR APPLYING TNMM AS MOST APPROPRIATE METHOD FOR ALL TRANSACTIONS. SOME INTERNATIONAL TRANSACTIONS HAVE TO BE TESTED BY APPLYING CUP METHOD, RESALE PRICE METHOD OR COST PLUS METHOD AND SELECTION OF APPROPRIATE METHOD IS DEPEN DS UPON NATURE OF TRANSACTIONS. THEREFORE, WE ARE OF THE C ONSIDERED VIEW THAT THERE IS NO MERIT IN THE ARGUMENTS TAKEN BY THE LD.AR FOR THE ASSESSEE THAT THE TPO / DRP HAS ERRED IN SE GREGATING DOMESTIC CAR SALE SEGMENT ON A STANDALONE BASIS FOR THE PURPOSE OF BENCHMARKING ALP OF INTERNATIONAL TRANSA CTIONS WITH ITS AE. 50. BE THAT AS IT MAY. THE FACT REMAINS THAT THE TP O WHILE SEGREGATING DOMESTIC CAR SALE SEGMENT ON A STANDALO NE BASIS 71 ITA NO.3192/CHNY/2017 HAS BENCHMARKED TRANSACTIONS BY CONSIDERING 5 COMPA RABLES SELECTED BY THE ASSESSEE IN ITS TP DOCUMENTATION. I T WAS THE CLAIM OF THE LD.AR FOR THE ASSESSEE THAT 5 COMPARAB LES SELECTED BY THE ASSESSEE ARE ALL HAVING DOMESTIC AS WELL AS EXPORT SALES AND THUS, FOR BENCH MARKING PURPOSE, THE LD TPO EIT HER SHALL HAVE TO SELECT NEW COMPARABLES OR SEGREGATE DOMESTI C SEGMENT OF COMPARABLES, OTHERWISE IT GIVES DISTORTI ON FIGURES. THE TPO HAS SEGREGATED DOMESTIC CAR SALES OF THE AS SESSEE AND TESTED BY APPLYING MARGIN OF COMPARABLES WHICH IS INCLUSIVE OF EXPORT SALES. WE FIND MERIT IN THE AR GUMENTS OF THE LD.AR FOR THE ASSESSEE FOR THE SIMPLE REASON THAT W HEN THE LD TPO IS CONSIDERING A PARTICULAR SEGMENT ON A STANDA LONE BASIS, THEN IT IS THE DUTY OF THE TPO TO BENCHMARK RELEVAN T SEGMENT BY SELECTING APPROPRIATE COMPARABLES, WHOSE FUNCTIONS PERFORMED, ASSET EMPLOYED AND RISK ASSUMED ARE ALSO SIMILAR TO FAR ANALYSIS OF THE ASSESSEES SEGMENT. IN THIS CASE, THE TPO HAVING SEGREGATED DOMESTIC CAR SALE SEGMENT ON A ST ANDALONE BASIS, HAS FAILED TO SELECT APPROPRIATE COMPARABLES OR TO CARVED OUT DOMESTIC SALE SEGMENT OF COMPARABLES TO COMPARE MARGINS OF THE ASSESSEE WITH COMPARABLE COMPANIES. THEREFO RE, WE 72 ITA NO.3192/CHNY/2017 ARE OF THE CONSIDERED VIEW THAT THE APPROACH OF THE TPO IS INCONSISTENT AND NEEDS TO BE RECONSIDERED. 51. AS REGARDS RE-COMPUTATION OF MARGIN OF THE ASSE SSEE BY CONSIDERING CERTAIN OPERATING / NON-OPERATING INCOM ES, WE FIND THAT THE AO HAS CONSIDERED ROYALTY INCOME RECEIVED FROM MOBIS, COMMISSION / DISCOUNT INCOME AND INSURANCE C LAIM RECEIVED BY THE ASSESSEE AS NON-OPERATING. THE TPO HAS GIVEN HIS OWN REASONS FOR REACHING TO A CONCLUSION THAT ALL THESE INCOMES ARE NON-OPERATING IN NATURE. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE REASONS GIVEN BY TH E TPO IN LIGHT OF VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE AND WE OURSELVES DO NOT SUBSCRIBE TO THE REASONS GIVEN BY THE TPO FOR THE SIMPLE REASON THAT THE ASSESSEE RIGHT FROM FINA NCIAL YEAR 2007-08 ONWARDS APPOINTED MOBIS LTD TO TAKE UP AFTE R SALES SERVICE ACTIVITIES CARRIED ON BY THE ASSESSEE BY TR ANSFERRING ITS BUSINESS TO MOBIS. AS PER THE AGREEMENT BETWEEN THE ASSESSEE AND MOBIS, MOBIS AGREED TO PAY LICENSE FEE AT 8.5% ON THE DOMESTIC SALES VALUE. THE ASSESSEE HAS CONS IDERED ROYALTY INCOME RECEIVED FROM MOBIS AS OPERATING IN NATURE, BECAUSE REVENUE RECEIVED FROM MOBIS FOR AFTER SALES SERVICE 73 ITA NO.3192/CHNY/2017 BUSINESS IN INEXTRICABLY LINKED WITH CAR SALES MADE BY THE ASSESSEE. FURTHER, THE ASSESSEE HAS PAID ROYALTY T O ITS PARENT COMPANY HMC, KOREA FOR SHARING TECHNOLOGY AND KNOW- HOW AND SAME HAS BEEN TREATED AS OPERATING EXPENSES BY THE TPO. THE ASSESSEE HAS RECEIVED ROYALTY INCOME FROM MOBIS UNDER SIMILAR AGREEMENT FOR SHARING TECHNOLOGY AND KNOW-H OW, BUT THE SAME HAS BEEN CONSIDERED AS NON-OPERATING BY TH E TPO. WHEN THE TPO HAS CONSIDERED ROYALTY PAYMENT BY THE ASSESSEE TO ITS PARENT COMPANY AS OPERATING IN NATU RE, THEN THERE IS NO REASON FOR THE TPO TO CONSIDER ROYALTY INCOME RECEIVED FROM MOBIS AS NON-OPERATING INCOME. THERE FORE, WE ARE OF THE CONSIDERED VIEW THAT THE LD.TPO WAS ERRE D IN CONSIDERING ROYALTY RECEIVED FROM MOBIS AS NON-OPER ATING. HENCE, WE DIRECT THE LD. TPO TO CONSIDER ROYALTY IN COME AS OPERATING INCOME FOR COMPUTING OPERATING MARGIN. 52. AS REGARDS COMMISSION / DISCOUNT INCOME, INCENT IVES AND INSURANCE CLAIM INCOME, WE FIND THAT ALL THESE INCO MES ARE GENERATED FROM MAIN BUSINESS ACTIVITY OF THE ASSESS EE OF MANUFACTURING AND SALES OF CARS. THE ASSESSEE HAS RECEIVED COMMISSION / DISCOUNT ON PROCUREMENT OF RAW MATERIA LS AND 74 ITA NO.3192/CHNY/2017 INSURANCE CLAIM IS RECEIVED TOWARDS DAMAGED CARS MANUFACTURED BY THE ASSESSEE. WHEN THE ASSESSEE IS RECOGNIZING INCOME FROM SALE OF CARS AS OPERATING I N NATURE, THEN INSURANCE CLAIM RECEIVED TOWARDS DAMAGED CARS IS ALSO OPERATING IN NATURE AND HENCE, WE ARE OF THE CONSID ERED VIEW THAT THE LD. TPO HAS ERRED IN CONSIDERING COMMISSIO N / DISCOUNT INCOME, INCENTIVES AND INSURANCE INCOME AS NON-OPER ATING INCOME. HENCE, WE DIRECT THE LD. TPO TO CONSIDER CO MMISSION / DISCOUNT INCOME, INCENTIVES AND INSURANCE CLAIM AS OPERATING INCOME FOR THE PURPOSE OF COMPUTING OPERATING MARGI N. 53. AS REGARDS FOREX LOSS, THE ASSESSEE HAS TREATED IT AS NON- OPERATING INCOME. THE MAIN REASON GIVEN BY THE ASS ESSEE TO TREAT FOREX GAIN / LOSS AS NON-OPERATING IN NATURE THAT MOST OF THE LOSS / GAIN IS ARISED FROM REPAYMENT OF EXTERNA L COMMERCIAL BORROWINGS, WHICH IS A FINANCE ACTIVITY AND NOT REL ATED TO BUSINESS ACTIVITY OF THE ASSESSEE. THE ASSESSEE FUR THER CLAIMED THAT, IT HAD CONSISTENTLY RECOGNIZING GAIN / LOSS A S NON-OPERATING IN NATURE AND THE SAME HAS BEEN ACCEPTED BY THE DEP ARTMENT FOR EARLIER ASSESSMENT YEARS. WE HAVE CONSIDERED R EASONS GIVEN BY THE LD.TPO IN LIGHT OF ARGUMENTS ADVANCED BY THE 75 ITA NO.3192/CHNY/2017 LD.AR FOR THE ASSESSEE AND FIND THAT THERE IS NO ME RIT IN ARGUMENTS OF THE LD.AR OF THE ASSESSEE FOR THE SIMP LE REASON THAT MERE TREATMENT OF THE ASSESSEE IN ITS BOOKS OF ACCOUNTS IS NOT A SUFFICIENT REASON FOR TREATING A PARTICULAR I TEM OF EXPENDITURE / INCOME IS OPERATING OR NON-OPERATING IN NATURE. BUT, WHAT IS TO BE SEEN IS THE NATURE OF INCOME. I N THIS CASE, THE ASSESSEE HAS DERIVED FOREX LOSS ON ACCOUNT OF F LUCTUATION IN FOREIGN CURRENCY AND SAID LOSS IS ARISED DURING THE COURSE OF BUSINESS OF THE ASSESSEE, EITHER FOR IMPORT OF RAW MATERIALS OR EXPORT OF GOODS OR BORROWINGS FROM EXTERNAL SOURCES . FURTHER, LOSS ARISED ON ACCOUNT OF FLUCTUATION IN FOREIGN CU RRENCY FOR PAYMENT MADE TO SUPPLIERS OF MATERIALS OR RECEIPTS FROM BUYERS OF ASSESSEE PRODUCT IS ALSO ARISED OUT OF MAIN BUSI NESS ACTIVITY OF THE ASSESSEE AND THUS, THE SAME CANNOT BE CONSID ERED AS NON-OPERATING IN NATURE. AS REGARDS, THE CLAIM OF THE ASSESSEE IN LIGHT OF PRINCIPLE OF CONSISTENCY, WE FIND THAT ALTHOUGH THE AO REQUIRES TO FOLLOW PRINCIPLES OF CONSISTENCY IN GIV ING TREATMENT OF PARTICULAR ITEM OF INCOME OR EXPENDITURE, BUT RES J UDICATA IS NOT APPLICABLE TO INCOME-TAX PROCEEDINGS. MOREOVER, TH E LAW IS EVOLVING DAY BY DAY, BASED ON VARIOUS FACTORS INCLU DING 76 ITA NO.3192/CHNY/2017 AMENDMENT TO THE ACT AND JUDGMENTS OF VARIOUS COURT S AND TRIBUNALS, AS PER WHICH IT IS DIFFICULT FOR THE AO TO GIVE A PARTICULAR TREATMENT FOR ANY ITEM OF INCOME OR EXPE NDITURE, WHEN THE LAW HAS BEEN SUBSTANTIALLY CHANGED IN SUBS EQUENT ASSESSMENT YEARS. FURTHER, IT IS A WELL SETTLED PR INCIPLE OF LAW THAT FOREX GAIN OR LOSS IS REVENUE IN NATURE AND OP ERATING INCOME/EXPENDITURE. THEREFORE, WE ARE OF THE CONSI DERED VIEW THAT THERE IS NO MERIT IN THE ARGUMENTS TAKEN BY TH E LD.AR FOR THE ASSESSEE THAT FOREX LOSS SHOULD BE CONSIDERED A S NON- OPERATING IN NATURE. HENCE, WE REJECT ARGUMENTS TA KEN BY THE ASSESSEE. 54. AS REGARDS WORKING CAPITAL ADJUSTMENT CLAIMED B Y THE ASSESSEE BY FILING ADDITIONAL GROUND, WE FIND THAT THE ISSUE IS NOW SETTLED BY VARIOUS DECISIONS INCLUDING THE DECI SION F ITAT, CHENNAI IN THE CASE OF DOOSAN POWER SYSTEMS INDIA P VT. LTD., IN ITA NO.581/MDS/2016, WHERE MYSELF IS ONE OF THE PARTY TO THE DECISION HELD THAT WORKING CAPITAL ADJUSTMENT NEEDS TO BE GIVEN WHILE COMPUTING OPERATING MARGIN OF THE ASSESSEE. THEREFORE, THERE IS MERIT IN ADDITIONAL GROUND TAKEN BY THE AS SESSEE 77 ITA NO.3192/CHNY/2017 REQUESTING WORKING CAPITAL ADJUSTMENT. BUT, FACT R EMAINS THAT SINCE ASSESSEE HAS TAKEN ADDITIONAL GROUND, THE FAC TS WITH REGARD TO CLAIM OF THE ASSESSEE WAS NOT BEFORE THE TPO. HENCE, THIS ISSUE NEEDS TO GO BACK TO THE FILE OF T HE TPO TO EXAMINE THE CLAIM OF THE ASSESSEE IN LIGHT OF FACTS RELATED TO WORKING CAPITAL ADJUSTMENT. 55. AS REGARDS PROPORTIONATE ADJUSTMENT, WE FIND TH AT THE LD.TPO HAS MADE TP ADJUSTMENT IN RESPECT OF INTERNA TIONAL TRANSACTIONS PERTAINS TO DOMESTIC CAR SALE SEGMENT, WHEREAS THE LD.DRP HAS ENHANCED SAID ADJUSTMENT BY ADJUSTIN G THE MARGINS TO ENTIRE TRANSACTIONS OF THE ASSESSEE, WHI CH PREDOMINANTLY CONSIST OF THIRD PARTY COST. WE FIND THAT AS PER THE PROVISIONS OF SECTION 92 OF THE ACT AND RULE 10 B(1)(E) OF THE RULES, IT IS VERY CLEAR THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE, THAT MEANS, VERY PURPOSE OF SAI D PROVISIONS IS TO ESTABLISH ARMS LENGTH NATURE OF THE INTERNAT IONAL TRANSACTIONS ONLY. THE TRANSACTIONS WITH NON AES H AS TO BE PRESUMED TO BE AT ARMS LENGTH, BECAUSE THERE IS NO RELATIONSHIP WHICH IS LIKELY TO INFLUENCE PRICING. IT IS ALSO A 78 ITA NO.3192/CHNY/2017 SETTLED PRINCIPLE OF LAW BY THE DECISION OF HONBLE HIGH COURT OF MADRAS IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2 012-13 IN W.A NO.1344 OF 2017, WHERE IT WAS CLEARLY HELD T HAT TRANSFER PRICING ADJUSTMENT CAN BE DONE ONLY IN RESPECT OF I NTERNATIONAL TRANSACTIONS AND CANNOT BE DONE ON THE BASIS OF ENT ITY LEVEL VALUES. THEREFORE, WE ARE OF THE CONSIDERED VIEW T HAT THE LD.DRP IS ERRED IN MAKING TP ADJUSTMENT AT ENTITY L EVEL AND HENCE, WE DIRECT THE TPO TO RESTRICT TP ADJUSTMENT ONLY TO INTERNATIONAL TRANSACTIONS PERTAIN TO DOMESTIC CAR SALES SEGMENT. 56. IN THIS VIEW OF THE MATTER AND CONSIDERING FACT S AND CIRCUMSTANCE OF THIS CASE, WE ARE OF THE CONSIDERED VIEW THAT THE WHOLE ISSUE OF TRANSFER PRICING ADJUSTMENT IN R ESPECT OF IMPORT OF GOODS PERTAINS TO DOMESTIC CAR SALES SEGM ENT NEEDS TO GO BACK TO THE FILE OF THE TPO TO RECONSIDER THE ISSUE IN LIGHT OF OUR DISCUSSIONS GIVEN HEREIN ABOVE IN PRECEDING PARAGRAPHS. HENCE, WE SET ASIDE THE ISSUE TO THE FILE OF THE TP O AND DIRECT HIM TO RECONSIDER THE ISSUE AFTER AFFORDING REASONA BLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 79 ITA NO.3192/CHNY/2017 57. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST SEPTEMBER, 2021 SD/- SD/- ( . ) ( . ) (V.DURGA RAO) ( G.MANJUNATHA ) # & / JUDICIAL MEMBER & / ACCOUNTANT MEMBER # /CHENNAI, ) / DATED 1 ST SEPTEMBER, 2021 DS +, -, /COPY TO: 1. APPELLANT 2. RESPONDENT 3. . () /CIT(A) 4. . /CIT 5. , 2 /DR 6. /GF .