M/s Yokogawa India Limited , Bangalore V. Assistant Commissioner of Income Tax LTU Circle-2 , Bangalore

ITA 3369/BANG/2018

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7743 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 20-12-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH MEENA
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; Double taxation relief; International transaction; Earning of tax free income; TDS; Rule 8D
• Section: 143(3); 14A; 144C; 13

Judgement Text

IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “A’’BENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A No.3369/Bang/2018 Assessment Year: 2014-15 M/s. Yokogawa India Limited Plot No.96, 3 rd Cross Electronic City, Hosur Road Bangalore 560 100 PAN NO : AAACY0840P Vs. ACIT LTU Circle-2 Bangalore APPELLANT RESPONDENT Appellant by : Shri Padam Chand Khincha, A.R. Respondent by : Shri Sumer Singh Meena, D.R. Date of Hearing : 27.10.2021 Date of Pronouncement : 25.11.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: The assessee has filed this appeal challenging the assessment order dated 30.10.2018 passed by the A.O. for assessment year 2014-15 u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] in pursuance of the directions given by Ld. Dispute Resolute Panel (“DRP”). 2. The assessee has raised many grounds in the original grounds of appeal and have also filed two petitions for admission of certain additional grounds. However, at the time of hearing, the Ld. A.R. advanced his arguments on the following issues only:- IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 2 of 13 a) Manufacturing segment. (i) Not considering provision for estimated losses on construction contracts as non-operating in nature. (ii) Inappropriate computation of operating profit margin in the case of M/s. Gansons Ltd. (iii) Granting of leverage of 5%. b) Trading segment. (i) Adopting of PLI as OP/OC instead of OP/OR. (ii) Incorrect computation of margin in the case of M/s. Telecommunication Consultants India Ltd. c) Global sales and marketing activity fee/Management fee Not appreciating that TNMM adopted at entity level would subsume payment of global sales and marketing activity fee and Management. Hence no separate TP adjustment is required. d) Disallowance made u/s 14A of the Act. e) Short credit of TDS. f) Deduction of education cess and secondary & higher education cess. g) Dividend distribution tax rate should be confined to the rate as per DTAA. Hence we confine ourselves to the above said issues. Accordingly all other grounds are dismissed as Not Pressed. IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 3 of 13 3. The business of the assessee consists of manufacturing, trading, installation and servicing of process control systems, industrial automation instruments/equipments and electrical measuring equipments. The activities carried on by the assessee has been categorized into three segments namely systems, trading of products and engineering services. The TPO proposed following transfer pricing adjustments. S.No. Description Amount (INR) 1. Manufacturing activity segment 2,70,60,000 2. Trading activity segment 6,26,00,000 3. Management fee 26,52,526 4 Global sales and marketing activity fee 2,16,24,501 Total 35,74,77,027 It is pertinent to note that the TPO has separately benchmarked the transactions of payment of Management fee and Global Sales and marketing activity fee separately, while the assessee had included them as expenses while computing margins under TNM method. 4. The assessee got partial relief before Ld. DRP and accordingly the transfer pricing adjustment came to be reduced to Rs.31.52 crores. 5. We shall first take up the issues argued by Ld. A.R. in respect of “manufacturing segment”. The first issue argued by the Ld. A.R. relates to claim that the “Provision for estimated loss on construction contracts” debited by the assessee in its profit & loss account and reversal of such provision credited to the Profit and Loss account should be treated as Non-operating in nature. IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 4 of 13 6. The Ld. A.R. submitted that in assessment year 2015-16, the DRP has directed that the Provision for estimated loss on construction contracts and reversal of the said provision should be treated as non-operating in nature. The Ld. A.R. submitted that, in order to maintain consistency, the same treatment should be adopted for the year under consideration also. 7. We heard Ld. D.R. on this issue and perused the record. We notice that the assessee is raising this plea for the first time before us. The assessee has taken the plea before us on the reasoning that the provision for estimated loss from construction contracts and reversal of said provision was treated as non-operating in nature in assessment year 2015-16 and hence the same treatment should be given in this year also. 8. First of all, it is not clear as to whether the treatment given by Ld DRP in AY 2015-16 has been accepted by the assessee or not, since such kind of provisions was made as per the mandate of Accounting Standards year after year. Hence it is required to be examined as to whether it is appropriate to treat the provision for expected loss as “non-operating” in nature when such provisions are created as per accounting principles and in compliance of accounting standards. Secondly, it is not clear as to whether such kind of provision made by the comparable companies was also considered as non-operating in nature in AY 2015-16 in their hands, since it is quite possible that the comparable companies would also be debiting the profit and loss account with such kind of provisions as mandated by the Accounting standards. There should not be any dispute that identical treatment for an item of expenditure should be given both in the hands of the assessee as well as in the hands of the comparable companies. Accordingly, IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 5 of 13 this claim of the assessee requires examination. In any case, this claim has been raised first time before us, meaning thereby, there was no occasion for the authorities below to examine this claim of the assessee in the year under consideration. Accordingly, we restore this claim of the assessee to the file of AO/TPO for examining it in accordance with law. 9. The next issue urged in the manufacturing segment is regarding consideration of leverage of 5%. The AO/TPO shall examine this claim of the assessee in accordance with law. 10. The third issue urged in manufacturing segment relates to computation of margin in the case of comparable company named M/s. Gansons Ltd. It is the contention of Ld. A.R. that the TPO has computed margin of this comparable company erroneously. Since the claim of the assessee requires examination, we restore this issue also to the file of the AO/TPO. 11. We shall now take up the issues argued in the case of trading segment. The TPO has adopted operating profit/operating cost as PLI in the case of trading segment. It is the contention of the assessee that the correct PLI should be taken as “Operating profit/Operating revenue”. In this regard, the Ld. A.R. placed his reliance on the decision rendered by Hyderabad Bench of Tribunal in the case of Deputy Commissioner of Income-tax Vs. St. Jude Medical India Pvt. Ltd (ITA No.914/Hyd/13 dated 19-09-2014). 12. We heard Ld. D.R. on this issue. We notice that the Hyderabad Bench of Tribunal has held in the above cited case that the operating profit to operating revenue to be correct PLI. The IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 6 of 13 decision rendered by the Hyderabad bench in the above said case is extracted below for the sake of convenience. 2. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the TP adjustment to be made to the total income of the assessee was worked out by the Assessing Officer/TPO by taking the Operating Profit to Operating Cost as PLI instead of Operating Profit to Operating Revenue taken by the assessee as PLI. On appeal, the learned CIT(A), however, accepted the Operating Profit to Operating Revenue as PLI as taken by the assessee for the following reasons given in Paragraph 6.2 and 6.3 of his impugned order- “6,2 I have considered the submissions of the TPO and the appellant in this regard. The purpose of identifying the PLI is to ensure that the comparability analysis of the controlled transactions is objective. Reference may be made to the OECD Transfer Pricing Guidelines, 2010 in this regard, which are self-explanatory. “2.88 The denominator should be reasonably independent from controlled transactions, otherwise there would be no objective starting point. For instance, when analyzing a transaction consisting in the purchase of goods by a distributor from an associated enterprise for resale to independent customers, one should not weight the net profit indicator against the cost of goods sold because these costs are the controlled costs for which consistency with the arm’s length principle is being tested. Similarly, for a controlled transaction consisting in the provision of services to an associated enterprise, one should not weight the net profit indicator against the revenue from the sale of series because these are the controlled sales for which consistency with the arm’s length principle is being tested. Where the denominator is materially affected by controlled transaction costs that are not the object of the testing (such as head office charges, rental fees or royalties paid to an associated enterprise, caution should be exercised to ensure that said controlled transaction costs do not materially distort the analysis and in particular that they are in accordance with the arm’s length principle. 2.89 The denominator should be one that is capable of being measured in a reliable and consistent manner at the level of the tax-payer’s controlled transactions. In addition, the appropriate base should be one that is capable of being measured in a reliable and consistent manner at the level of the comparable uncontrolled transactions. This is practice limits the ability to use certain indicators, as discussed at paragraph 2.99 below. Further, the taxpayer’s ITA No.914/Hyd/2013 M/s. St. Jude Medical India Private Limited, Hyderabad 3 allocation of IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 7 of 13 indirect expenses to the transaction under review should be appropriate and consistent over time.” 6.3 In the appellant’s case the controlled transaction is the purchase of goods from the AE which are later sold to unrelated parties. Adoption of cost as the denominator would lead to a situation where there is no objective starting point for the comparability analysis. The Assessing Officer is therefore directed to adopt operating profit to operating revenue ratio as the PLI and the third ground of appeal is allowed.” 3. As noted by the learned CIT(A), the purpose of identifying the PLI is to ensure that the comparability of the controlled transactions is objective and reference in this regard was made by him to the OECD Transfer Pricing Guidelines 2010, wherein it was explained that the denominator should be reasonably independent from controlled transactions, as otherwise, there would be no objective starting point. Explaining further, it was observed in the OECD Transfer pricing Guidelines that when analyising a transaction consisting in the purchase of goods by a distributor from an associated enterprise for resale to independent customers, one could not weigh the net profit indicator against the cost of goods sold because these costs are the controlled costs for which consistency with the arm’s length principle is being tested. In the present case, the issue involved was relating to determination of Arms length price of the international transactions of the assessee company with its AE involving purchase of medical devices, and this being so, we are of the view that the CIT(A) was fully justified in accepting the Operating Profit to operating Revenue as the PLI, as claimed by the assessee for Transfer Pricing Analysis, and not Operating Profit to Operating Cost as taken by the Assessing Officer/TPO, relying on the relevant OECD Transfer Pricing Guidelines, 2010. At the time of hearing before us, the Learned Departmental Representative has also not been able to raise any material contention to dispute or controvert this position. We, therefore, uphold the impugned order of the learned CIT(A) on this issue and dismiss the appeal of the Revenue.” Following the above said decision, we direct the AO/TPO to adopt “operating profit/operating revenue” as PLI and determine the ALP of trading segment accordingly. 13. The next issue contested in the trading segment is that the TPO has computed margin of comparable company named M/s. Telecommunication Consultant India Ltd. incorrectly. Since the claim of the assessee requires verification, we restore this issue to the file of AO/TPO. IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 8 of 13 14. We shall now take up the issue relating to TP adjustment made in respect of payments of Global Sales & Marketing activity fee and Management fee. The assessee did not benchmark these payments made to its AE separately, since it adopted TNM method at entity level. However, the TPO bench marked the same separately and accordingly proposed TP adjustment of Rs.2.16 crores in respect of payment of Global Sales and Marketing activity fee and Rs.26.52 lakhs in respect of payment of management fee. The Ld DRP also upheld the above said adjustments. 15. The Ld A.R submitted that identical TP adjustments were made in AY 2010-11 and the Tribunal, vide its order dated 09-06- 2017 passed in IT(TP)A No,342/Bang/2015 and IT(TP)A No.464/Bang/2015, has cancelled the same holding that these expenses form part of operating cost. It was further held that these payments have to be allocated in the ratio of turnover of the other international transactions and ALP of the other international transactions has to be determined under TNM method by including them as operating cost. 16. We heard Ld D.R on this issue and perused the record. We notice that the co-ordinate bench has considered an identical issue and has expressed the view as submitted by Ld A.R. For the sake of convenience, we extract below:- “4. We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. We find that the assessee has carried out multiple and diversified international transactions in different segments. The international transactions of the assessee involve charges for raw material and components, sales and manufacturing goods, reimbursement of expenses, payment towards royalty and management fees, charges of IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 9 of 13 capital equipment, payment of intra-goods services, charges of material, commission income, rendering of software services, reimbursement of expenses and Global Sale and Marketing Activity Fees. The TPO has accepted all other transactions except the international transactions regarding Global Sale and Marketing Activity Fees. It is pertinent to note that the international transactions of the assessee are comprising of revenue receipt from the AE as well as revenue payment to the AE. Therefore in these facts and circumstances of the case, we find that when the other international transactions regarding revenue receipt from the AE are tested under the TNMM analysis then the transaction of fee payment by the assessee towards the services rendered by the AE should not be separately tested but all the international transactions having receipt from the AE and payment to the AE shall be clubbed together and then has to be analysed under TNMM. We further note that the DRP has directed the TPO to determine the ALP in respect of the Global Sale and Marketing Activity Fees instead of considering the ALP at NIL. Therefore in principle we do not find any error or illegality in the directions of the DRP however having regard to the peculiar facts and circumstances of the case wherein the assessee is having multiple and diversified international transactions involving receipt as well as payment, we are of the considered view that the payment in respect of management fees as well as Global Sale and Marketing Activity Fees shall be considered as operating cost and has to allocated in the ratio of turnover of the other international transactions and then the ALP of the other international transactions has to be determined under TNMM analysis. Hence we set aside the entire issue of determination of ALP and TP Adjustment to the record of the TPO/A.O. for carrying out fresh exercise of determination of ALP in respect of international transactions by considering the payment in respect of management fees and Global Sale and Marketing Activity Fees as part of the operating cost and allocating the same in the ratio of the turnover of the other international transactions. IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 10 of 13 Following the decision rendered in the assessee’s own case in AY 2010-11, we restore these two issues to the file of AO/TPO with similar directions. 17. The next issue urged by the assessee relates to disallowance made u/s 14A of the Act. The assessee had received exempted dividend income of Rs.24,86,000/- and has disallowed a sum of Rs.48,573/- u/s 14A of the Act. The A.O. noticed that the assessee did not have opening or closing balance of investments as on the balance sheet dates. However, during the course of the year, the assessee has invested in dividend yielding securities. The peak of investments made during the year under consideration was Rs.72.09 crores. Hence, the A.O. took the view that the disallowance made by the assessee is not correct. He noticed that the Ld. DRP has directed in assessment year 2013-14 to recompute peak investment value and make disallowance accordingly. Following the said methodology, the A.O. computed average value of assets at Rs.395.51 crores and disallowance u/s 14A of the Act at Rs.19,03,752/-. Accordingly, the A.O. assessed the differential amount of Rs.18,55,179/-. The Ld. DRP upheld the disallowance. 18. Before us, the Ld. A.R. submitted that the A.O. has not recorded dis-satisfaction on the disallowance made by the assessee. Hence, the A.O. could not be resorted to provisions of Rule 8D. 19. We heard Ld. D.R. on this issue and perused the record. We notice that the A.O. has examined the disallowance worked out by the assessee and has expressed the view that the disallowance has to be worked out on the basis of peak value of investments. Hence, it is discernible from the observations made by the AO that he was not satisfied with the working made by the assessee. Hence we IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 11 of 13 reject the contentions of the assessee that the AO has not recorded dissatisfaction on the workings made by the assessee. 20. We noticed earlier that the assessee has made investments during the course of the year and has sold the same before the end of the year. Accordingly, the value of investments as on beginning of the year and as on end of the year were Nil. In this fact situation, the provisions of Rule 8D cannot be applied since computations prescribed in those rules are not possible in the absence of opening and closing value of investments, i.e., computational provisions of rule 8D would fail in this case. Even though the Rule 8D prescribed for computation of disallowance to meet the requirements of sec. 14A fails, in our view, it is required to disallow the expenses related to the exempt income. We noticed earlier that against exempted dividend income of Rs.24,86,000/-, the assessee has disallowed a sum of Rs.48,573/- only u/s 14A of the Act. The said disallowance does not appear to be correct when compared with the peak value of investments of Rs.72.09 crores. In these facts, we are of the view the disallowance may be estimated to meet the requirements of section 14A of the Act. Accordingly, we are of the view that an estimated disallowance of 10% of the dividend income would meet the requirements of provisions of Section 14A of the Act and the same will put this issue at rest. Accordingly, we direct the A.O. to restrict the disallowance u/s 14A of the Act to 10% of exempt dividend income. He may work out the addition accordingly. 21. The next issue relates to non-granting of proper TDS credit. Since this issue requires examination at the end of the A.O., we restore to his file with the direction to allow credit for correct amount of TDS. IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 12 of 13 22. The next issue relates to claim of deduction of education cess and secondary & higher education cess paid during the year as expenditure. The Ld. A.R. took support of the decision rendered by Hon’ble Bombay High Court in the case of Sesagoa Ltd. Vs. JCIT 423 ITR 426 and certain other decisions to contend that the education cess does not fall under the category of Income tax and hence the same should be allowed as deduction against the profits of the assessee. Since the claim of the assessee gets support from the decision rendered by Hon’ble Bombay High Court in the case of Sesagoa Ltd. (supra) and since this issue is urged for the first time before us, we restore this issue to the file of AO for examining the claim of the assessee in accordance with the decisions referred above. 23. The next issue contested by the assessee relates to the claim that the dividend distribution tax rate should be confined to the rate as per DTAA for the dividend distributed to non-resident assessees. The Ld A.R submitted that the assessee has raised the above said ground on the basis of decision rendered by Delhi bench of Tribunal. However, the Ld. A.R. fairly submitted that this issue has been referred to a special bench and accordingly pleaded that this claim of the assessee may be restored to the file of the A.O. with the direction to follow the decision that may be rendered by the special bench in future. 24. We heard Ld. D.R. on this issue. Having regard to the submissions made by the Ld. A.R., we restore this issue to the file of the A.O. with the direction to follow the decision that may be rendered by special bench of Tribunal on this issue in due course. IT(TP)A No.3369/Bang/2018 M/s. Yokogawa India Limited, Bangalore Page 13 of 13 25. In the result, the appeal filed by the assessee is treated as partly allowed for statistical purposes. Order pronounced in the open court on 25 th Nov, 2021 Sd/- (George George K.) Judicial Member Sd/- (B.R. Baskaran) Accountant Member Bangalore, Dated 25 th Nov, 2021. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.