M/s Inteva Products India Automotive Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-3(1)(1), Bangalore

ITA 3357/BANG/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4434 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 16-08-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 19-12-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AKAL SPRING LIMITED
• Keywords: Depreciation; Transfer pricing; Double taxation relief; Opportunity of being heard; International transaction; Corroborative evidences; TDS; Set aside
• Section: 92C; 143(3); 92; 142(1); 40(a)(ia); 144C; 143(2); 207; 192; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESEIDENT AND SHRI PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.3357/Bang/2018 Assessment year : 2014-15 Inteva Products India Automotive Private Ltd., Manyata Embassy Business Park, N1 Block, 4 th Floor, Outer Ring Road, K R Puram Hobli, Nagawara, Rachenahalli Village, Bangalore – 560 045. PAN: AABCM 9623K Vs. The Deputy Commissioner of Income Tax, Circle 3(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri M P Lohia, CA Respondent by : Shri Rajesh Kumar Jha, CIT(DR)(ITAT), Bengaluru. Date of hearing : 17.08.2022 Date of Pronouncement : 22.08.2022 O R D E R Per Padmavathy S., Accountant Member This appeal by the assessee is against the final assessment order of the DCIT, Circle 3(1)(1), Bangalore passed u/s. 143(3) r.w.s 144C of the Income-tax Act, 1961 [the Act] dated 31.10.2018 for the assessment year 2014-15. 2. The assessee is a wholly owned subsidiary of Inteva Products Netherland BV, which is ultimately held by RENCO Group, USA. IT(TP)A No.3357/Bang/2018 Page 2 of 33 The assessee is engaged in the business of providing design engineering support and supply of automobile components to group companies as well as third parties. The assessee has two segments Engineering Design Services (EDS) segment and Manufacturing segment and reported international transactions in these segments during the year. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing Engineering Design Services and Manufacturing services were “international transaction” i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the Any income arising from an international transaction shall be computed having regard to the arm’s length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms’ Length Price (ALP) in respect of the Manufacturing Services to the AE. The arm’s length price [ALP] of the international transactions has been determined by applying TNM IT(TP)A No.3357/Bang/2018 Page 3 of 33 Method stating it to be the most appropriate method. The Operating Profit to Operating Cost (OP/O) has been taken as the Profit Level Indicator [PLI]. The PLI of the comparables is arrived at by considering the weighted average margin of minimum 2 out of 3 years data. 3. The assessee filed return of income for the AY 2014-15 on 30.11.2014 declaring total loss of Rs.6,84,36,086. Subsequently the case was selected for scrutiny under CASS and notice u/s. 143(2) dated 18.9.2015 was issued and served on the assessee. Since the assessee company had international transactions with its AE reference was made to the TPO in order to determine the ALP of the international transactions. The TPO accepted the ALP margin of the DES segment. However the TPO made an overall TO adjustment of Rs.28,75,99,909 consisting of an adjustment on the manufacturing segment for an amount of Rs.22,56,25,485 and an adjustment of Rs.6,19,74,424 towards management fees paid by the assessee towards intra-group services. The AO passed a draft assessment order incorporating these TP adjustments. In addition, the AO made an a disallowance towards reversal of year end provisions of 31.03.2013to the tune of Rs.5,48,95,774. Aggrieved, the assessee filed the objections before the DRP. The DRP gave marginal relief in the TP adjustment due to which the TP adjustment was reduced to Rs. 26,81,54,543 and the DRP confirmed the adjustment towards the year end provision. The AO passed the final order as per the directions of the DRP. The assessee is in appeal aggrieved by the final order of AO. IT(TP)A No.3357/Bang/2018 Page 4 of 33 4. The assessee has raised 16 grounds of appeal as under i. Grounds no. 1 and 2 are general in nature and does not warrant separate adjudication ii. Ground Nos.3 to 13 are relating to TP adjustment. Out of this Ground No.3, 7 and 9 are not pressed and are dismissed accordingly iii. Ground No.14 relates to disallowance to provision reversed iv. Ground No. 15 and 16 relate to interest u/s.234B and penalty u/s.271 of the Act which are consequential not warranting separate adjudication . 5. The assessee has also raised additional ground (Ground no.17) with regard to operating margin of the AE segment to benchmark the international transaction of manufacturing segment not being considered by the TPO. The ld. DR did not have objection to the admission of additional ground. 6. The additional ground goes to the root of the matter and following the Hon’ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional ground is admitted for adjudication. TP adjustment in Manufacturing Segment 7. The segmental financials as per the TP document for the manufacturing segment is as given below IT(TP)A No.3357/Bang/2018 Page 5 of 33 Particulars Amount Total income as per P&L 89,19,14,042 Less: Non-Operating Income Dividend Profit on sale of Asset 1,31,21,799 Non-Operating item 8,82,425 Interest 3,88,679 Total operating Income 87,92,85,989 Total expenses as per P&L 1,02,87,75,759 Less: Extraordinary costs Exchange difference due to restatement of prior years creditors, debtors, ECB Loan and ECB interest 10,68,79,522 Adjustment on account of high depreciation cost 3,03,42,711 Total Operating Expenses 89,15,53,526 Total Operating Profit -1,22,67,537 Operating profit / Operating Cost -1.38% 8. In the manufacturing segment the assessee had selected 13 comparables listed below and since the average weighted margin of the comparables worked out to -2.12% and therefore the assessee concluded that the margins for the manufacturing segment are within ALP. SL.No Name of the Company (M/s) Weighted Margin (%) 1 Akal Spring Ltd. -3.83 2. Canara workshops Ltd. -0.96 3 Coventry Coil-O-Matic Ltd. -6.58 4 Gabriel India Ltd. 0.12 5 Jamna Auto Industries Ltd. -0.70 6 Jonas Woodhead -12.34 7 M&M Auto Industries Ltd. -1.74 8 NHK Spring India Ltd. 3.17 9 QH Talbros Ltd. 0.59 10 Torsion Products Ltd. -9.68 11 Toyo Springs Ltd. 2.86 12 Minda Corporation Ltd. 0.50 13 Sandhar Technologies Ltd. 1.08 Average -2.12 IT(TP)A No.3357/Bang/2018 Page 6 of 33 9. The TPO did not accept the comparables selected by the assessee and carried out fresh search to select following 6 comparables: Sl.No Name of the company OP OC OP/OC - % 1 Jay Ushin Ltd 15.1 650.0 2.32 2 Omax Autos Ltd 10.3 1098.43 0.94 3 Admach Auto India Ltd 4.05 61.13 6.63 4 Elan Auto India Ltd 1.99 26.02 7.65 5 QH Talbros Ltd 1667 34177 4.88 6 Sandhar Technologies Ltd 7048 97026 7.26 Average 4.95 10. Based on the above average margin of 4.95% the TPO computed the adjustment u/s. 92CA in the manufacturing segment. The TPO while computing the TP adjustment did not consider the working capital adjustment, and the extraordinary cost adjustment made by the assessee towards exchange difference and the depreciation. The TP adjustment computed by the TPO is as given below. Particulars Amount (Rs) Operating Cost 1,05,27,96,772 Arm's length mean margin 4.95% Arm's Length Price @ 104.95% of Operating Cost 1,10,49,10,212 Operating Revenue 87,92,84,727 Excess cost being adjustment u/s 92CA 22,56,25,485 11. In addition to the above the TPO also made an adjustment towards management fees paid by the assessee for intra-group services on the ground that it failed the benefit test and therefore determined the ALP at NIL, which resulted in TP adjustment of Rs.6,19,74,424. IT(TP)A No.3357/Bang/2018 Page 7 of 33 Non-granting of working capital adjustment 12. Ground No.4 reads as follows:- “On the facts and in the circumstances of the case and in law, the learned AO based on the Directions of Hon'ble DRP has: Erred in not granting suitable adjustments to account for differences in the working capital employed by the comparable companies for manufacturing segment of the Appellant.” 13. The ld. AR submitted that the issue is covered by the decision of the coordinate Bench of the Tribunal in the case of Huawei Technologies India (P). Ltd. v. ACIT, in IT(TP)A Nos. 1940, 2140, & 2051 (BANG.) OF 2017 for AYs 2010-11 & 2013-14 vide order dated 4.8.2021. The ld AR also submitted that in assessee’s own case for AY 2013-14 the Hon’ble Tribunal has considered the similar issue wherein the issue is remitted back to the AO/TPO and prayed for similar directions for the year under consideration. 14. We have considered the rival submissions and perused the material on record. We notice that the coordinate Bench of the Tribunal in the case of Huawei Technologies India (P). Ltd. v. ACIT, in IT(TP)A Nos. 1940, 2140, & 2051 (BANG.) OF 2017 for AYs 2010-11 & 2013-14 vide order dated 4.8.2021 has allowed the working capital adjustment. The relevant observations are as follows:- “11. A reading of rule 10B(1)(e)(iii) of the Rules read with sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. IT(TP)A No.3357/Bang/2018 Page 8 of 33 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: ♦ None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or ♦ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive IT(TP)A No.3357/Bang/2018 Page 9 of 33 environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: ♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. IT(TP)A No.3357/Bang/2018 Page 10 of 33 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No. 2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable IT(TP)A No.3357/Bang/2018 Page 11 of 33 companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com (2016) 75 taxmann.com 195(Del. - Trib.) has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of rule 10B(1)(e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions IT(TP)A No.3357/Bang/2018 Page 12 of 33 should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.' 16. Respectfully following the aforesaid decision, we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.” 15. Respectfully following the decisions of the Hon’ble Tribunal in the case of Huawei Technologies India (P) Ltd. (supra), we direct the IT(TP)A No.3357/Bang/2018 Page 13 of 33 AO to allow the working capital adjustment and re-compute the ALP accordingly. This ground is allowed. Abnormal foreign exchange difference considered as operating in nature 16. Ground No.5 by the assessee is as follows:- “On the facts and in the circumstances of the case and in law, the learned AO based on the Directions of Hon'ble DRP, has: Erred in treating the extra ordinary foreign exchange difference amounting to INR 10,68,79,522 due to movement in foreign exchange rates as operating in nature while computing operating margins of manufacturing segment.” 17. The assessee in the TP study has treated the exchange difference due to re-statement of prior year’s creditors, debtors, ECB Loan and ECB interest as extra-ordinary cost and has excluded the same from the total expenses to arrive at the operating expenses. The TPO while arriving at the TP adjustment has considered the forex loss as operating in nature and has included the same as part of operating cost. On the objections, the DRP held as follows :- 2.5.3 The foreign exchange loss of INR 2,00,04,340 debited to the profit and loss account pertaining to repayment of ECB loan (which was capital in nature) was considered as non-operating in nature while computing the operating margins of Inteva India. Accordingly, the Assessee requested to consider the exchange difference of INR 2,00,04,340 (being capital in nature) as non-operating. B. The foreign exchange loss of 1NR 10,68,79,522 on account of reinstatement of year end creditors, debtors and ECB loan was primarily due to the adverse movement in the exchange rates. The value of Rupee had depreciated vis-E-vis the other currencies. As a result there was a net increase in cost which was reported in the Profit IT(TP)A No.3357/Bang/2018 Page 14 of 33 and Loss account. The foreign exchange loss of INR 10,68,79,522 comprises of the following: a) Foreign exchange loss of INR 3,43,12,997 on account of reinstatement of ECB loan at the year end; and b) Net foreign exchange loss of INR 7,25,66,525 on account of reinstatement of debtors, creditors and bank balances. 2.5.4 Having considered the submissions, we are of the view that the foreign exchange fluctuation has been held as operating in nature in the decision of Hon'ble Bangalore ITAT in case of Sap Labs India (P) Ltd. vs. Asstt. CIT [2011) 44 SOT 156/[20101 8 taxmann.com 207 (Bang.). A similar view was also taken in the case of Cisco Systems Services BE (IT(TP)A No.270/Bang/2014), wherein it is held that “We are of the opinion that the foreign exchange fluctuation gain arising to the assessee on realization of trade debtors, payment to creditors, etc, were nothing but operational income." In view of the above, we do not find any infirmity in the approach of the Assessing Officer in considering the foreign exchange fluctuation on revenue account in respect of the assessee company as well as the comparable companies as operating in nature while determining the margin in the case of the assessee company. The above objection is accordingly rejected. 2.5,5 The other component of the foreign exchange loss is on account of Exchange difference to the extent considered as an adjustment to the borrowing cost. We do find that this plea was not taken before the TPO, Before us also the assessee has made a claim in the written submission but has not produced the necessary evidence/ documents in support of the same. Therefore, the TPO/AO may verify the claim of the assessee and if it is on Capital Account, then the foreign exchange fluctuation has to be treated as non-operating in nature. This ground is therefore, partly allowed.” 18. The ld. AR submitted that after the DRP directions, the TPO has given relief only to the extent of Rs.2,00,04,340 which is the exchange difference of repayment of ECB loan. However, the TPO did not give benefit with respect to Rs.3,43,12,997 arising out of reinstatement of IT(TP)A No.3357/Bang/2018 Page 15 of 33 ECB loan at the end of the year. The ld. AR submitted that the DRP in para 2.5.3 has given a clear finding that forex loss pertain to ECB which was capital in nature was to be considered as non-operating. Therefore the benefit should be applied for forex loss on the reinstatement of ECB loan also. 19. The ld. DR relied on the order of the AO/TPO. 20. We have considered the rival submissions and perused the material on record. The DRP in para 2.5.5.has given a direction to the AO/TPO to verify the claim of the assessee that foreign exchange loss of INR 3,43,12,997 is on account of reinstatement of ECB loan at the year end and that if it is on Capital Account, then the foreign exchange fluctuation has to be treated as non-operating in nature. We also notice that in para 2.5.3, the DRP has given a clear finding that the exchange fluctuation pertaining to ECB loan which was capital in nature has to be considered as non-operating. However the TPO in the OGE has given relief to the assessee only to the extent of Rs.2,00,04,340 and has not considered the direction given for the re-instatement of ECB. In view of the above we remit this issue back to the AO/TPO to consider the directions of DRP to verify the claim of the assessee that foreign exchange loss of INR 3,43,12,997 is on account of reinstatement of ECB loan and consider the as non-operating for the purpose of arriving at the ALP. It is ordered accordingly. IT(TP)A No.3357/Bang/2018 Page 16 of 33 Rejection of comparable companies 21. Ground No.6 reads as follows:- “On the facts and in the circumstances of the case and in law, the learned AO based on the Directions of Hon'ble DRP, has: Erred on facts and circumstances of the case by rejecting the following companies considered as comparable for the manufacturing segment by the Appellant by applying erroneous comparability filter: • Akal Spring Limited; • Canara Workshops Limited; • Coventry Coil-O-Matic Limited; • Gabriel India Limited; • M&M Auto Industries Limited; and • Torsion Products Limited.” 22. As per the profile of the assessee in the TP study the Pune Unit of the assessee is engaged in manufacturing of automotive components. The ld AR submitted that the 13 comparables chosen by the assessee for the purpose of TP study are also engaged in the same business and the TPO while rejecting the comparables has compared the components manufactured by the comparable companies i.e. leaf springs, spring assemblies, billets and has rejected the same. The ld AR drew our attention to the remarks given by the TPO in the order (para 8.2.1 page 12 of TPO order) where the TPO himself states that the products manufactured by the comparables are supplied to the commercial vehicles and for automotive application. The ld AR further submitted that for AY 2011-12, the TPO has accepted the same comparables in the manufacturing segment [page 552 of PB]. IT(TP)A No.3357/Bang/2018 Page 17 of 33 23. The ld. DR relied on the orders of lower authorities. 24. We notice that the comparables rejected by the TPO are mainly into manufacturing of leaf springs, spring assemblies, billets which are used in the automobile industry. Under TNMM, the net profit of a controlled transaction of an associated enterprise (tested party) is determined and this net profit is then compared to the net profit realized by comparable uncontrolled transactions of independent enterprises. As opposed to other transfer pricing methods, the TNMM requires transactions to be “broadly similar” to qualify as comparable. “Broadly similar” in this context means that the compared transactions don’t have to be exactly like the controlled transaction. Therefore component level comparison as done by the TPO is not a requirement since the assessee is using TNMM as the MAM. Further the TPO himself has stated in the order that components manufactured by comparable companies are supplied to automobile business. It is also noticed that these companies are accepted as comparable companies in earlier years for the assessee’s ALP computation by the TPO. In view of the above discussion, we are of the considered view that the TPO is not right in rejecting the above companies and therefore we direct the AO/TPO to include the above listed 6 companies as comparables and re-compute the ALP accordingly. IT(TP)A No.3357/Bang/2018 Page 18 of 33 Rejection of internal TNMM analysis 25. Ground No.8 raised by the assessee is as follows:- “On the facts and in the circumstances of the case and in law, the learned AO based on the Directions of Hon'ble DRP, has: Erred in rejecting the alternative analysis undertaken by the Appellant using Internal TNMM as the most appropriate method to benchmark the international transaction pertaining to manufacturing segment.” 26. The assessee in the TP study has carried out a supplementary analysis for the international transaction pertaining to sale of goods by the assessee to its AE by bench marking the same separately (page 147-148 of paper book). The tested party chosen for this purpose is the assessee itself for the reason that the assessee does not own any significant intangible and its profitability can be reliably ascertained. For the purpose of comparison, the margin earned the assessee on sale of goods to its AE is benchmarked against the margin earned while selling similar goods to third parties having regard to the FAR of both transactions. The PLI for this purpose is taken as Operating Profit / Operating Revenue. The unadjusted profit margin of the assessee from sale of goods to third parties came to – 17.95% whereas the assessee earns an operating margin of 17.54% on sale of goods to its AE. Since the operating margin on the transactions with AE is much higher than the operating margin earned on transaction with third parties, the assessee concluded that the sale of goods transaction between the assessee and its AE is within the Arm’s Length from Indian TP perspective. The relevant part of the TP study is extracted below :- IT(TP)A No.3357/Bang/2018 Page 19 of 33 “5.2.1 Choice of tested party As mentioned above, the tested party is usually the participant in a transaction for which profitability can be ascertained most reliably and for which reliable data on comparables can be found. The tested party will also typically be the party with the least intangibles. For the international transactions under consideration, Inteva India has been chosen as the tested party due to the fact that it does not own any significant intangible and its profitability can also be reliably ascertained. 5.2.2 Search for comparable uncontrolled data Inteva India undertakes same/similar transactions in an uncontrolled scenario, details of which have been provided below. 5.2.3 Comparability analysis During the financial year ended 31 March 2014, Inteva India has sold goods to its AEs as well as uncontrolled third parties. Accordingly, in order to benchmark the sale of goods by Inteva India to its AEs, comparison has been done with the margin earned by Inteva India on selling similar goods to third parties (having regard to the functions performed, assets employed and risks assumed by Inteva India for both these activities). In view of such internal comparison, net operating margins of this business could be considered for internal comparability purposes. 5.2.4 Financial analysis Selection of PLI For the purpose of internal TNMM analysis, the operating profits/ operating cost earned by the rehire business activity of Inteva India have been compared with the operating profit/ operating cost of the leasing/ rental business. The ratio used for the TNMM analysis is as follows: IT(TP)A No.3357/Bang/2018 Page 20 of 33 Operating Profit . Operating Revenue  Operating Revenues = Revenues from operating activities excluding other non-operating income [i.e., interest/dividends received, etc.]  Operating Cost = Total Cost [includes foreign exchange gains/ losses] excluding extra-ordinary expenses/ non- recurring expenses/ non-operating expenses [i.e., profit/ (loss) on sale of fixed assets, amortisation of preliminary expenses, interest payments, etc.] and tax.  Operating Profit = Operating Revenues - Operating Cost 5.2.5 Conclusion Based on the information provided by Inteva India, average of the unadjusted operating margin of Inteva India from sale of goods to third parties (computed as defined above) is -17.95 percent on operating revenue. Further, as per the information provided by Inteva India, it earns an operating margin of 17.54 percent on sale of goods to its AEs. A summary of split financial statements capturing margin earned by Inteva India from sale of goods to AEs vis-à-vis third parties is enclosed in Annexure 13. Since Inteva India's operating margin from sale of goods to AEs of 17.54 percent on operating cost is higher than the margin of the comparable sale to third parties of -17.95 percent, the sale of goods transaction between Inteva India and its AEs could be considered to be at arm's length from an Indian transfer pricing perspective.” 27. The TPO failed to consider this alternate analysis done by the assessee while concluding the assessment u/s.92CA. On further objections, the DRP relying on its the earlier order for AY 2012-13 rejected the submissions of the assessee by observing as under:- IT(TP)A No.3357/Bang/2018 Page 21 of 33 “2.9.1 Having considered the submissions, it is noticed that the assessee has raised this ground before the earlier DRP in AY 2012-13 as well and the finding of the DRP was as under: "We are not satisfied with the argument of the assessee that a CA certificate itself will be sufficient. The TPO has specifically asked for the audited financials which we also approve. Giving a certificate from a CA alone will not be sufficient. It is important that the segmental data forms part of the audited financials. It has also been seen that the earlier DRP in AY 2012-13 has also rejected the claim of the assessee on internal TNMM. We also find no reason to differ with the decision made by the earlier DRP as facts are almost the same and hence, this ground is accordingly, rejected." 2.9.2 The facts of the assessee in this year is similar as was in AY 2012-13. Therefore, we have no reason to deviate from the stand taken in the AY 2012-13 and hence, we reject this ground of the assessee as well.” 28. The ld. AR submitted that the DRP rejected the assessee’s claim based on the fact that the CA certificate is not sufficient and that the segmental data should have been part of audited financials. The ld. AR further submitted that for the year under consideration, the assessee has considered the split financials in the TP study as per the segmental data taken from the audited financials (page 288 of paper book) and this fact has not been considered by the DRP. 29. The ld. DR relied on the orders of lower authorities. 30. We have considered the rival submissions and perused the material on record. We notice that the DRP has rejected the internal TNMM for the reason that the CA certificate submitted in this regard cannot be accepted as was done in the earlier. It is also noticed that the IT(TP)A No.3357/Bang/2018 Page 22 of 33 assessee has submitted the audited financials [at pg. 8 to 25 of PB] before the lower authorities and the ld AR submitted that the split financials is prepared as per the audited financials. This is not examined factually by the lower authorities. We therefore remit this issue back to the AO/TPO with a direction to examine the segmental data for the purpose of internal TNMM and decide the issue in accordance with law. 31. In the application for admission of additional grounds the assessee had submitted that the additional ground (Ground No.17) is in continuation of Ground no.8 and in this regard the ld AR submitted that for AY 2016-17 the assessee has considered the AE as the tested party in the TP study (page 1505 to 1538 of paper book) and the same is accepted by the TPO (page 1539 to 1601 of paper book). 32. We heard both parties, and in view of our decision with regard to ground no.8, where we have remitted the issue back to the AO/TPO, we direct the AO to consider only the operating margin of the AE segment of international transaction of manufacturing segment while determining the ALP considering the internal TNMM analysis where the AE is the tested party. Benchmarking the transaction of payment of management fee and considering the ALP as NIL 33. Ground No.10 raised by the assessee is as follows:- “10. On the facts and in the circumstances of the case and in law, the learned AO based on the Directions of Hon'ble DRP, has: IT(TP)A No.3357/Bang/2018 Page 23 of 33 Erred, in facts and circumstances of the case, by computing the arm's length price of the international transaction of payment of management fee to its AE as Nil and not applying any one of the six methods recognised under section 92C of the Act for determination of ALP of management fees.” 34. In the TP study the assessee has benchmarked the payment of management fees towards intra group services separately[pg. 149 & 151 of PB]. The assessee has used the AE as the tested party for this purpose. The assessee searched from overseas database to identify comparables who provide “business support services” in ‘Europe region. The PLI is considered as Operating Profit / Operating Cost. Based on the comparability analysis the assessee concluded that the transaction is within arm’s length. 35. The TPO rejected the TP study of management fees and computed the ALP at NIL by adopting CUP method. The reason stated by the TPO is that the payment of the management fees towards rendering of the intra group support services does not satisfy the benefit test and that the assessee has produced only power point presentations and emails which does not evidence that the services in the nature of management and technical services are actually rendered. The TPO also stated that no third party would make payment for services the assessee has brought on record by way of e-mails filed before the TPO. The DRP confirmed the same. 36. The ld. AR submitted that the assessee has done the supplementary analysis for the payment of management fees in the TP study by choosing the AE as the tested party. The ld. AR also IT(TP)A No.3357/Bang/2018 Page 24 of 33 submitted that the benefit test cannot be applied by the TPO since the assessee has submitted all the evidence substantiating the services rendered by the AE [pg. 662 of PB]. It was further submitted that the amount of management fee is considered as income by invoking the make available clause in the hands of the AE, Inteva Netherlands BV and taxed accordingly. The ld. AR therefore submitted that the revenue cannot take two contradictory views while assessing income in the hands of the assessee and its AE. 37. The ld. AR brought to our notice that submitted that the issue is covered by the decision of the coordinate Bench of the Tribunal in the assessee’s own case for AY 2010-11 where the Tribunal has remanded the issue back to the AO and he therefore prayed for similar directions for the year under consideration also. The ld. AR also submitted that the TPO while passing the order giving effect to the ITAT order for AY 2010-11 has accepted the ALP of the management fees [pg. 623 of PB]. 38. We have considered the rival submissions and perused the material on record. We notice that the coordinate Bench of the Tribunal in the assessee’s own case for AY 2010-11 in IT(TP)A No.73 & 136/Bang/2015 dated 20.7.2016 has considered the issue and held as under:- “20. We have considered the rival submissions as well as the relevant material on record. At the outset we note that the TPO has treated the ALP of royalty in question at Nil on the ground that the assessee failed to produce any supporting evidence as to how the royalty has been computed and further the assessee has IT(TP)A No.3357/Bang/2018 Page 25 of 33 failed to show that the assessee has derived some benefit from the transfer of technology for which the royalty to be paid to the AE. As far as the justification and deriving the benefit from transfer of technology is concerned this is beyond the scope of the process of determining the ALP by the TPO, therefore we do not agree with the view of the TPO that the assessee was required to establish the benefit derived from the technology transfer by the AE against which the royalty has been paid. Once the assessee is under obligation as per the license agreement to manufacture the items under the license owned by the AE then it is irrelevant to prove that the assessee has derived special benefit from the technology transferred by the AE. When the manufacturing activity itself has been carried out as per the license granted by the AE under the terms and conditions of the license agreement then the TPO is not allowed to outrightly reject the claim of royalty. The jurisdiction and power of the TPO is only to determine the ALP of the royalty in comparison to the comparable price. The TPO has not made any endeavour or took any step to examine the royalty payment by considering with comparable prices. We further note that for the Assessment Year 2012-13, the TPO vide its order dt.12.2.2016 has accepted the royalty and service charges at in para 6 as under : "6. Royalty & Service Charges Paid. The taxpayer had paid royalty amounting to Rs.2,76,87,745 to its AE. The tax payer vide its submission dt.14.1.2016 submitted that it is royalty payment is 3% the net sales of the licensed products and services of the Pune Unit. The taxpayer had undertaken a search in the Database Royaltystat. The taxpayer conducted a benchmarking analysis for the Royalty paid to the AE using the external CUP Method. The search resulted in 5 similar cases of royalty payments whose arithmetic mean was 9%. The taxpayer had paid Rs.2,76,87,745 against sales of Rs.129,37,31,949 which is 2.14% on sales. In view of the above, no adverse inference is drawn in respect of the international transaction of royalty payment." As the assessee has produced the relevant evidence including the license agreement under which the Royalty has been paid to AE IT(TP)A No.3357/Bang/2018 Page 26 of 33 therefore, in the facts and circumstances of the case, we set aside this issue to the record of the TPO/TPO to re-examine the issue as per the provisions of transfer pricing and in the light of the evidence produced by the assessee as well as the T.P. order passed under Section 92CA for the Assessment Year 2012-13. Needless to say that the assessee be given an appropriate opportunity of hearing before deciding the issue.” 39. We also notice that the revenue has taxed the same income in the hands of the AE Inteva Netherlands BV by invoking the “make available clause” of the DTAA between India and Netherlands. Considering the above we are of the view that the details submitted by the assessee substantiating the services rendered by the AE need to be examined and therefore we remit the issue back to the AO/TPO with the direction to verify the details and allow the claim of the assessee in accordance with law after giving reasonable opportunity of being heard to the assessee. 40. Ground Nos. 11 reads as follows:- “On the facts and in the circumstances of the case and in law, the learned AO based on the Directions of Hon'ble DRP, has: 11. TP adjustment should be restricted to international transactions with associated enterprises Erred in making transfer pricing adjustment on the entire manufacturing segment of the Appellant rather than restricting the adjustment to the value of international transactions with Associated Enterprises pertaining to manufacturing segment of the Appellant. 41. The ld. AR submitted that the TPO has considered the margin of the entire manufacturing segment of the assessee while making the TP adjustment without restricting the adjustment to the value of IT(TP)A No.3357/Bang/2018 Page 27 of 33 international transaction with AE. He drew our attention to the fact that the issue is covered by the decision of the coordinate Bench of the Tribunal in assessee’s own case for AY 2013-14 [IT(TP)A No.2843/Bang/2017] wherein it is held that the TP adjustment should be restricted to international transactions with the AE. 42. The ld. DR relied on the orders of the lower authorities. 43. We have considered the rival submissions and perused the material on record. Rule 10B(1)(e)(i) reads as under:- (e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; 44. From the above Rule, it is clear that under TNMM while computing the ALP only the international transactions need to be considered. We also notice that the coordinate the Tribunal in assessee’s own case (supra) has considered a similar issue and has held that – “14. We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. Admittedly, this issue came for consideration in assessee’s own case in the assessment year 2010-11. The Tribunal on this issue observed in para 23 in ITA No.83/Bang/2015 dated 20.7.2016 that TPO was confined to the adjustment to the value of international transactions only as the section 92 of the Act applies with reference to IT(TP)A No.3357/Bang/2018 Page 28 of 33 computation of income from international transactions having regard to ALP in this AY 2013-14 and other domestic transactions cannot be considered for determining ALP in this A.Y. Being so, we direct the AO/TPO to confine the TPO adjustment only on international transaction in manufacturing segment only.” 45. Respectfully following the above decision of the Hon’ble Tribunal we hold that for the purpose of TP adjustment only the international transactions should be considered. We therefore direct the AO/TPO to restrict the TP adjustment only to the international transactions in the manufacturing segment. 46. Ground Nos. 12 reads as follows:- “12. Incorrect computation of transfer pricing adjustment to the value of international transaction pertaining to the manufacturing activities Without prejudice to the other grounds, the learned TPO and the learned AO have erred in facts and in circumstances of the case, by not reducing the value of payment of management fee while computing the operating cost of the Assessee while determining the PLI; after considering the arm's length price of the same as NIL.” 47. We have already adjudicated the issue of determination of ALP of management fees at NIL in para 39 above, and therefore ground no.12 has become academic and does not warrant separate adjudication. 48. Ground No.13 is consequential and does not warrant separate adjudication. IT(TP)A No.3357/Bang/2018 Page 29 of 33 Corporate Grounds 49. Ground No.14 reads as follows:- “On the facts and in the circumstances of the case and in law, the learned AO based on the Directions of Hon'ble DRP, has: 13. Incorrect taxation of provision reversed of INR 5,48,95,774 in AY 2014-15 Erred on the facts and in circumstances of the case by disallowing amount of INR 5,48,95,774 in AY 2014-15 where such amount was already offered to tax in AY 2013-14 under section 40(a)(i) of the Act.” 50. The AO observed that in the statement of computation of income for the year under consideration furnished, the assessee had deducted an amount of Rs.5,48,95,774/- from its total income on account of reversal of provisions made for the previous year end 31.03.2013. The assessee vide notices under section 142(1) of the IT Act dated 13.11.2017 and 16.11.2017 was asked to furnish complete ledger of each parties for A.Y.2013-14 and 2014-15 by reflecting their payments in the books for A.Y. 2013-14 and also evidence of tax deducted on these amounts in FY 2014-15 with remittance of tax into government account. In response, the assessee furnished its submission dated 21.11.2017 wherein it stated that the company makes monthly provisions for expenses on ad-hoc basis in its books of account and subsequently reverses these provisions. As the expenses were on ad- hoc basis and reversed subsequently, the assessee did not withhold taxes on the same and followed the approach of withholding taxes only on accounting such expenses on actual basis. Thus, such year-end IT(TP)A No.3357/Bang/2018 Page 30 of 33 provisions have been disallowed under section 40(a)(i)/(ia) of the Act in the computation of income and offered to tax in AY 2013-14. The assessee has further stated that as the provisions have been reversed in the subsequent year AY 2014-15, a deduction is now specifically claimed to ensure there is no double taxation of the same amount u/s. 37 of the Act. 51. The arguments of the assessee were considered by the AO and found not acceptable on the ground the assessee company has not made TDS on this amount of provision during the year which was disallowed during the AY 2013-14. The AO stated that only if the TDS was made and paid to Government account, the claim for deduction can be made under section 40(a)(ia) in the year of payment and therefore disallowed the amount of Rs.5,48,95,774/- u/s. 37 of the Act. The DRP upheld the disallowance made by the AO. 52. The ld. AR submitted that the impugned deduction is claimed not on the basis of subsequent tax deduction, but on the basis that entries are reversed in the current year and taxing the same would amount to double disallowance. The ld. AR therefore submitted that the amount claimed needs to be allowed as a deduction for tax computation purposes. The ld AR also submitted that the assessee, based on mercantile system of accounting, makes a provision for various expenses that have accrued at the end of the year but for which invoices are not received at the end of the year. The ld. AR further submitted that the provisions created was not only offered to tax during IT(TP)A No.3357/Bang/2018 Page 31 of 33 the year of creation, but in the AY 2010-11, these were either reversed or utilized for payment of the invoices, on which taxes were deducted at source at applicable rate of tax. It is submitted that the entire sum of provision created having suffered tax in the previous assessment year, ought to be allowed as a deduction during the year under consideration, on its reversal/incurring of the expenditure on which taxes were deducted at source. 53. The ld. DR supported the orders of the lower authorities and submitted that the assessee has not furnished any supporting evidence to substantiate the claim of deduction 54. We heard the rival submission and perused the materials on record. According to the ld AR the accounting practice of the assessee is to make the provision for expenses 31 st March of the financial year and reverse the same on the 1 st day of April of subsequent financial year. The assessee disallowed the provision made on 31 st March of 2013 in the computation of income for the assessment year 2013-14. The same amount is claimed as a deduction in the subsequent in the computation of income as the year end provisions are reversed on 1 st April 2013. The contention of the assessee that the deduction claimed if not allowed will result in double disallowance has merits. The expenses disallowed is eligible for deduction u/s.40(a)(ia) of the Act as and when the tax is deducted at source on such expenses. The reversal of provisions done on 1 st April 2013, would go to nullify the impact of the expenses claimed by way of debit to the profit and loss account on IT(TP)A No.3357/Bang/2018 Page 32 of 33 which tax is deducted at the time of the payment. Therefore the reversal of provisions disallowed in the computation of assessment year 2013-14 is to be claimed as a deduction in the assessment year 2014-15 so that the expenses eligible for deduction u/s.40(a)(ia) is rightly claimed in the computation. However the most important fact that needs to be verified in this regard is whether the provision made on 31 st March 2013 to the tune of Rs. Rs. 5,48,95,774 is reversed on 1 st April 2013 and that the same is reflected correctly in the provision for expenses ledger of the assessee. This needs to be verified to justify the claim of deduction of the said amount in the computation of assessment 2014-15 basis the disallowance done in the year 2013-14. The deduction as per the ld AR is done based on the fact that the provisions which are already disallowed in the previous assessment year is reversed and to avoid double disallowance the same is claimed as deduction in the computation. This fact has not been properly presented before the lower authorities. The lower authorities have to examine whether the year-end provision made on 31 st March 2013 is fully reversed on 1 st April 2013 and the expenses against which the provision was created is debited to the profit and loss account on payment after deducting TDS. This verification need to be carried out based on the journal entries and ledger copies produced by the assessee for the year under consideration which are submitted now in the form of additional evidence. If the accounting practice of the assessee to reverse the expenses on the 1 st day of April of the year under consideration is substantiated by the evidences submitted by the IT(TP)A No.3357/Bang/2018 Page 33 of 33 assessee whereby it is demonstrated that there is no doubt allowance expenditure then the assessee would be entitled to claim the amount disallowed in the previous assessment year as otherwise it would amount to double disallowance. We therefore remit the issue back to the AO to verify the ledger and general entries of the assessee for the year under consideration and allow the expenditure in accordance with law. The assessee may be given a reasonable opportunity of being heard in this matter. The appeal is allowed in favour of the assessee for the statistical purposes. 55. In the result, the appeal of the assessee is partly allowed. Pronounced in the open court on this 22 nd day of August, 2022. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 22 nd August, 2022. / Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.