SCHNEIDER ELECTRIC SYSTEMS INDIA PRIVATE LIMITED, CHENNAI V. ACIT, CORPORATE CIRCLE-6(1), CHENNAI

ITTPA 48/CHNY/2021

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 3885 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 15 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 16-06-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 01-09-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Residential status; Rectification of order; Double taxation relief; Principle of natural justice; International transaction; Application of stay; Advance ruling; Wholly owned subsidiary; Bad and doubtful debts; Tax effect; TDS; FORM 26AS
• Section: 145; 92C; 92D; 92A; 195; 201; 92CA

Judgement Text

आयकरअपीलीयअिधकरण,‘डी’ यायपीठ,चे ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ी जी मंजूनाथा, लेखा सद के सम , ी अिनके श बनज , ाियक सद एवं BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER आयकर अपील सं./I.T.(TP)A No.:48/Chny/2021 िनधा रण वष /Assessment Year: 2014– 2015 & S.A. No.38/Chny/2022 [in I.T.(TP)A No.:48/Chny/2021] M/s. Schneider Electric Systems India Private Limited, SP Plot No.6-20 & 20A, Tamarai Tech Park, Thiru Vi Ka Industrial Estate, Guindy, Chennai – 600 032. PAN : AABCS 8027M Vs. The Assistant Commissioner of Income Tax, Corporate Circle – 6(1), 7 th Floor, Wanaparthy Block, Aayakar Bhawan, Nungambakkam, Chennai – 600 034. (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओरसे/Appellant by : Shri. Rohit Tiwari, Advocate यथ क ओरसे/Respondent by : Dr. S. Palani Kumar, CIT सुनवाईकीतारीख/Date of Hearing : 13.06.2022 घोषणाकीतारीख/Date of Pronouncement : 17.06.2022 आदेश /O R D E R PER ANIKESH BANERJEE, JM: The appeal by the Assessee is directed against the final assessment order of the learned Assistant Commissioner of Income Tax, Corporate Circle – 6(1), Chennai (in brevity the AO) bearing order dated 11.12.2018 passed u/s.143(3) r.w.s 92CA(4) r.w.s.144C(13) of the Income Tax Act, 1961 (in brevity “the Act) in ::2 :: I.T.(TP)A No.:48/Chny/2021 relation to the assessment order for the Assessment Year 2014 – 2015. 2. Tersely stated facts of the case are that the Assessee, an Indian company and part of the Invensys Group, was incorporated in 1996 as Invensys India Private Limited, as a 100% subsidiary of Invensys Plc, UK. In July 2013, the French Group Schneider Electric announced its takeover of the Invensys Group, globally. The takeover was completed in January 2014. Pursuant to the same, In February 2016, the name of the Assessee was changed from Invensys India Private Limited to Schneider Electric Systems India Private Limited [SESIPL]. There has been no changed in the shareholding structure of SESIPL pursuant to the name change. The Assessee has two divisions (1) Invensys Process Systems (IPS), Chennai and (2) Appliance Control Division (ACD). 2.1 In this case, the Transfer Pricing Officer [TPO] has proposed a transfer pricing adjustment of Rs.159,29,31,162/- in respect of the international transaction with the Associated Enterprises [AE]. Aggrieved by this order, the Assessee had filed an objection before the learned Dispute Resolution Panel-2, Bengaluru (in brevity “ the DRP”) against the draft assessment order dated 15.12.2017. The learned DRP passed an order dated 27.09.2018 with a proposal in ::3 :: I.T.(TP)A No.:48/Chny/2021 different issues. After the proposal of the learned DRP, the final assessment order was passed dated 11.12.2018. 2.2 The following impugned order is under appeal before the Income Tax Appellate Tribunal [ITAT]. The Assessee filed the following grounds which are extracted as under: [1] “General : Schneider Electric Systems India Private Limited ('SESIPL' or 'the Appellant') submits that the Final Assessment Order dated 11 December 2018 passed by the Assistant Commissioner of Income Tax, Corporate Circle 6(1), Chennai ('AO') pursuant to the directions issued under section 144C(5) of the Income-tax Act, 1961 ('the Act') vide order dated 27 September 2018 passed by the Dispute Resolution Panel ('DRP') is bad in law and is contrary to the facts and circumstances of the present case. The detailed grounds of appeal, including the position in law and facts is set out in the ensuing paragraphs. [2] Ground relating to the legality of the directions issued by the Learned DRP 2.1 The Learned DRP has erred in law by arbitrarily rejecting the objections raised by the Appellant vide a non- speaking order merely relying upon the observations of the TPO and the AO. 2.2 The directions passed by the learned DRP is wholly non-speaking, lacks application of mind and without considering various objections raised by the Appellant. 2.3 The learned DRP has erred in law by not exercising its powers and examine the objections raised before it as an independent quasi-judicial authority and has not dealt with the various issues and specific arguments raised by the Appellant. 2.4 The order of the learned DRP is contrary to principles of natural justice and bad in law and on facts. Grounds relating to Transfer Pricing :: [3] Transfer pricing adjustment at the entity level without restricting the adjustment to the proportion of international transactions ::4 :: I.T.(TP)A No.:48/Chny/2021 3.1 The Learned DRP grossly erred in law and on facts by violating the principles of natural justice by confirming the order of the TPO proposing an adjustment of INR 1,33,24,99,356 which is in excess the total value of international transactions entered into by the Appellant in the IPS projects segment, thereby violating the provisions of Chapter X of the Act. 3.2 The Learned DRP, erred in law by violating the basic principles of transfer pricing envisaged in section 92(1) of the Act, which requires that only income arising from an international transaction shall be at arm's length. 3.3 The Learned DRP erred in law and on facts by making transfer pricing adjustment at the entity level though the Tax Department's special leave petition in the case of Firestone International Pvt. Ltd (CA 8177 of 2016), referred to by the TPO in his order, has been dismissed by the Hon'ble Supreme Court with a batch of appeals. 3.4 The Learned TPO and Learned DRP erred in law and on facts by failing to apply the principles of consistency in computing the transfer pricing adjustment. The Ld. TPO in the prior and subsequent years has computed the adjustment in proportion to international transactions. 3.5 The Learned DRP erred in law and on facts and circumstances of the case in making contradictory observations with respect to the entity level transfer pricing adjustment, thereby upholding an adjustment 4 times the value of the purchases from AEs and 3.5 times the AE revenue. 3.6 The Learned DRP erred in law and on facts in disregarding the additional submissions filed before Learned DRP on Firestone International Pvt. Ltd and not providing any meaningful hearing/ opportunity to the Appellant to present its case. [4] Adjustment towards international transactions in the IPS segment – Tax Effect – INR 1,33,24,99,356. 4.1 The Learned TPO and Learned DRP erred in law and on facts and circumstances of the case in rejecting the segmental approach adopted by the Appellant, bifurcating the projects division into J3 and Non-J3 segments, without appreciating the economic and commercial parameters of the operations of each segment, thereby disregarding the provisions of Section 92C of the Act, read with Rule 10B(2) of the Income Tax Rules, 1962. ::5 :: I.T.(TP)A No.:48/Chny/2021 4.2 The Learned TPO and Learned DRP erred in law and on facts of the case by failing to take cognizance of the difference in pricing strategy adopted for J3 and other than J3 projects, economic and commercial parameters of operations of the projects, even though the nature of work is broadly similar. 4.3 The Learned DRP erred in law and on facts of the case in disregarding the certified segmentation maintained by the Appellant based on their own conjectures and surmises by merely questioning the authenticity of the tools used by the Appellant without providing any cognizant reasons for rejection contrary to the acceptance of similar data by Learned DRP for the EEC segment. Treatment of Provision for Contract Losses: 4.4 The Learned TPO and Learned DRP erred in law and on facts and circumstances of the case in treating the provision for contract losses in relation to the J3 project as operating in nature while computing the operating margin of the company, failing to appreciate the extraordinary nature of the provision. 4.5 The Learned DRP erred in law and on facts in treating provision for contract losses as operating on the pretext that consistent approach has been taken for comparable companies without appreciating the fact that the comparable companies did not have any such extraordinary provisions during the year. 4.6 The Learned DRP erred on facts and circumstances of the case in considering provision for contract losses as operating expenditure on the pretext that the same has been claimed as an admissible expenditure in the return of income, failing to appreciate that the treatment of an item as operating is independent of its admissibility under income tax provisions. 4.7 The Learned TPO and Learned DRP erred on facts and circumstances of the case in not considering the profitability over the life of the project and the Appellant's reversal of the provisions in the subsequent assessment years. 4.8 The learned DRP erred in law and facts by following an inconsistent approach for same set of facts to uphold the adjustments made by AO and TPO, stating that provisions are scientific under transfer pricing objections while rejecting the expenses as ad-hoc provisions under corporate tax objections. [5] Adjustment towards international transactions in EEC Segment – Tax Effect – INR 2,07,63,746/- ::6 :: I.T.(TP)A No.:48/Chny/2021 5.1 The Learned TPO and Learned DRP erred in law and on facts in failing to aggregate the same class of international transactions undertaken by the Appellant in the EEC segment during the year for the purpose of determination of arm's length price, thereby disregarding the provisions of Section 92C of the Act, read with Rule 10B(2) of the Income Tax Rules, 1962. 5.2 The Learned TPO and Learned DRP erred on facts and circumstances of the case in computing the profits on a project by project basis by ignoring that the Appellant operates as a captive service provider with an assured margins at the net segment level. 5.3 The Learned TPO and Learned DRP erred in taking into account only those work orders which were executed at a lower/ negative margin, ignoring the orders where the profitability of the Appellant was significantly higher than the comparable companies. 5.4 The Learned DRP erred in law and on facts by failing to adopt a consistent approach for the IPS and EEC segments by adopting an aggregated approach instead of bifurcation between J3 and Other than J3 projects in the IPS segment and segregated approach based on the profits in the EEC segment. [6] Adjustment towards losses incurred in the ACD Segment – Tax Effect – INR 6,69,98,131/- 6.1 The Learned TPO and Learned DRP and erred in law and on facts and circumstances of the case in not considering the fact that it was the initial year of operations for ACD segment with operational inefficiency during the year, resulting in lower yield and wastages, thereby commercially impacting the profitability in the segment. 6.2 The Learned TPO and Learned DRP failed to appreciate the economic and commercial considerations with regard to price constraints and market demand, as a result of the slowdown of the growth in the market, thus leaving the fixed costs unabsorbed. 6.3 The Learned TPO and Learned DRP erred in law and on facts and circumstances of the case in not providing any economic adjustments to eliminate the differences between the Appellant and the comparable companies, as prescribed under Rule 10B(3) of the Income Tax Rules, 1962. [7] Adjustment towards Recovery of Expenses – Tax Effect – INR 5,76,56,884/- ::7 :: I.T.(TP)A No.:48/Chny/2021 7.1 The Learned DRP erred in law and on facts and circumstances in alleging a mark-up of 4.68% thereon on the recovery of expenses, without appreciating the fact that these are mere recoupment of expenses relating to travel costs and do not relate to provision of services. 7.2 The Learned DRP erred in not appreciating that these are mere expenses / pass through costs incidental to the services rendered and the Assessee does not operate as a travel agency. 7.3 The Learned DRP erred in selecting companies which are engaged in the business of travel agency, which are distinctly different and functionally not comparable to the business of the Appellant. 7.4 Without prejudice, the Learned DRP failed to consider that the costs associated to the function of rendering services (including such travel activity etc.) has been included in the cost base and only the third-party costs of the Appellant has been considered as pass though. Grounds relating to Corporate Tax: [8] Disallowance of provisional for contract losses – Tax Effect – INR 34,90,83,776/- 8.1 The learned DRP erred in confirming the order of the AO that provision for contract losses is an adhoc provision and is in the nature of unascertained liability. 8.2 The learned DRP erred in confirming the order of the AO, by disregarding the submission made by the Appellant which explained that the provision created towards contract losses was on a scientific and reasonable basis. 8.3 The learned DRP has failed to appreciate that provision for contract losses was created in accordance with Accounting standard "AS-7- Accounting for Construction Contracts" issued by the Institute of Chartered Accountant of India. 8.4 The learned DRP erred in law and facts by following an inconsistent approach for same set of facts to uphold the adjustments made by AO and TPO. [9] Non-Grant of TDS Credit – Tax Effect – INR 7,80,109/- 9.1 The learned DRP erred in conforming the order of AO for non-grant of TDS credit amounting to INR 7,80, 109 without considering the Appellant's contention. 9.2 The learned DRP and AO failed to appreciate that the Appellant had claimed credit for TDS as per Form 26AS ::8 :: I.T.(TP)A No.:48/Chny/2021 and the income offered to tax as per the ITR was higher vs- a-vis the income appearing in the Form 26AS. 9.3 The learned DRP and AO also erred in facts by concluding that the Appellant had offered lower income to tax as per Form 26AS vis-a-vis the ITR. 9.4 The learned DRP and AO also erred in law and facts by not granting credit for TDS as appearing in the Form 26AS of the Appellant. [10] Disallowance of payment of shared service expenses to Invensys Inc., USA on account of Non-deduction of taxes under section 195 of the Act – Tax Effect – INR 7,205,880/-. 10.1 The learned DRP erred in confirming the order of the AO with respect to disallowance of payment made to Invensys Inc USA for shared service expenses amounting to INR 2,12,00,000 on account of non-deduction of taxes under section 195 of the Act. 10.2 The learned DRP and AO erred in law by disregarding the plea of Appellant to keep the issue in abeyance as an application for advance ruling was filed with Authority for Advance Ruling ('AAR') which is pending for adjudication. 10.3 The learned DRP failed to appreciate that the subject payment does not involve rendition of any services which is technical or consultancy in nature and that no technical knowledge, experience, skill, know-how, or processes is being made available. 10.4 The learned DRP and AO erred in law and on facts in confirming that the subject payment for would fall under the definition of Fees for included Services as per India-US DTAA and hence tax is liable to be deducted under section 195 of the Act vide passing a rectified order u/s.154 of the Act. [11] Consequential Relief The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra as also all consequential relief thereto, including and not limited to reinstatement of appropriate amount of taxable income. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, and to submit such statements, documents and papers as may be considered necessary either at or at any time before the hearing of this appeal. ::9 :: I.T.(TP)A No.:48/Chny/2021 3. Considering the above grounds, here we are adjudicating the issues ground-wise. The first Ground No.1 is general in nature and Ground No.4 [4.1 to 4.3] was not pressed by the learned Assessing Officer during hearing. So, the rest of the grounds are adjudicated as follows:- 4. Ground No.8 [8.1 to 8.4] : Disallowance of provision for contract losses amounting to Rs.102,70,19,053/-. The Assessee made a project J3 and in anticipation of losses in finances, created a provision for such losses to the extent of Rs.102.7 crore. The learned Assessing Officer after examining held that it is an ad-hoc provision and not an ascertainable liability. Accordingly, the Assessing relied on the order of M/s. EDAC Engineering Limited Vs. DCIT reported in 141 ITD 231 wherein it is held that it is a cardinal principle that only the expenses incurred or losses suffered could be allowed and future loss / cost could not be allowed. The Assessee before the learned DRP has not provided any details of the losses for ascertaining the same and accordingly the provision of loss was rejected. On the other hand, the Assessee argued that the Assessee’s income is under the head of ‘business’ and Section 145 of the Act will be applicable and that the Assessee company is following the “AS-7” accounting standards, anticipating of the losses the provision was made. ::10 :: I.T.(TP)A No.:48/Chny/2021 4.1 We considered the documents available on records. The provision of future losses is not at all accepted and the provision which had been created by the Assessee is liable to be rejected. Accordingly, this Ground of the Assessee is dismissed. 5. Ground No.4 [4.4 to 4.8] : Treatment of provision for contract losses as operating in nature: This provision of contract losses is discussed in the order of the learned DRP which is extracted as follows: “1B. Learned TPO erred in law und on facts and circumstances of the case In treating the provision for contract losses in relation to the J3 project as operating in nature while computing the operating margin of the company, failing to appreciate the extraordinary nature of the provision. The Learned TPO erred in considering provision for contract losses as operating expenditure on the pretext that the same has been claimed as cm admissible expenditure in the return of income, failing to appreciate that the treatment of an item as operating is independent of its admissibility under income tax provisions. The Learned TPO erred on facts and circumstances of the case in notconsidering the profitability over the life of the project and the Assessee 's reversal of the provisions in the subsequent assessment years. Panel : The contention is with regard to the treatment of provision for contract losses. The TPO treated the same as operating while the assessee contends that the said provision is non- operating and should be excluded for margin computation. The contentions of the assessee are carefully considered. This provision is created by ::11 :: I.T.(TP)A No.:48/Chny/2021 the Assessee during the current year based on the reasonable estimate of expenses in the project and claimed the same in the return. For income tax purposes this provision is claimed as admissible expenditure of the year and no reversal is made in the return. Further, the provision relates to the operations of the Assessee in execution of contract works and surely fall under the bracket of operating expenses. Those provisions which are scientifically computed and claimed are allowed as expenses under the regular IT provisions and even for TP purposes they constitute operating expenses. Further the TPO has taken consistent stand for Assessee as well as for the comparable. Hence, the contentions of the Assessee cannot be accepted. Ground rejected.” 5.1 On consideration of the issue, we already discussed in the above-mentioned paragraphs that the particular provision of contract losses is duly rejected by the Income Tax Appellate Tribunal in the same order. Accordingly, this particular ground on contract losses cannot be accepted as is operating in nature. The issue is itself controversial for taking the issue as operating in nature, this particular losses is not ascertainable. Thus, this issue of future losses cannot be accepted as operating. So, we are not accepting the inconsistent approach of the learned DRP. Hence, this ground of the Assessee is allowed. 6. Ground No.4 [4.9 to 4.10] : Treatment of other income as non-operating in nature: The Revenue authorities did not consider the other income as operating expenses whereas treated the same ::12 :: I.T.(TP)A No.:48/Chny/2021 as non-operating expenses. The learned Counsel of the Assessee pointed out from its paper-books which were filed in two volumes, relevant page no.488. It is specifically mentioned about the details of other income and its nature. “Details of Other Income : Particulars Amount Liabilities no longer required written back 329,970,848 Provision for doubtful debts 8,558,260 Provision for warranty 8,333,592 Miscellaneous Income 10,647,186 Total 357,509,886 “As your good self may appreciate, the EEC / software segment ls an entirely captive service segment and hence, the provision for doubtful debts and warranty have been considered only for the projects division. Further, J3, being entered into only in AY 2014-1.5, these reversals relate to provisions created for other projects. The liabilities written back amounting to Rs. 32.99 crores, relate to payables, waived by the Invensys AEs. These once again relate to the Other than J3 segment as there are no cost base transactions in the EEC/ software segment while the J3 segment was started only in AY 2014-15. Hence, these have been included only in the "Other than J311 segment. (Refer Tab B). The miscellaneous income of Rs. 1.07 crores relates to scrap sales and write of admin related payables, which are common for all segments of the Assessee. Accordingly, the same has been allocated based on the turnover.” 6.1 The learned Counsel of the Assessee further mentioned that the liabilities written back is no longer required to be written back as during the course of its business, Invensys Systems Inc. had sold ::13 :: I.T.(TP)A No.:48/Chny/2021 goods to SESIPL on credit during the earlier financial years for which a liability was created in the books of accounts of the Assessee, for the amount payable. During the current year, Invensys Systems Inc. had entered into a “Settlement and Release Agreement” for waiving off an amount of INR 324,781,882/- payable by SESIPL on account of various commercial reasons. Further, the Assessee had also determined that certain other vendor payments were no longer required. Hence, the liability in this regard was reversed. So, this reversal is directly related to the business operations of the Assessee and the costs incurred upon creating the liabilities has been considered as operating and it shall only be prudent that reversals are also considered as part of the operating income. The learned Counsel of the Assessee further discussed that the provision of written back is in accordance with the requirements of the Accounting Standards 9 on Revenue Recognition. The revenue from project sales is accounted for under the “percentage of completion” method. The billing of the company may not necessarily coincide with the recognition of the revenue, as billing is generally based on the milestones such as completion of supply and at the commissioning stage and not on the stage of completion of the contract. Hence, there are situations where the billing for a particular contract may be less than or in excess of revenue recognized on such contract. This results in recognition of unbilled revenue and income billed in ::14 :: I.T.(TP)A No.:48/Chny/2021 advance. The income billed in advanced is reviewed on a year on year basis and a provision for the corresponding costs is created in the books of the Assessee. Based on the annual review, the provisions are reversed if required. Further, in miscellaneous income of Rs.1.07 crore, it is related to the scrap sales and write of admin related payables which are directly related to the business operations. 6.2 In this respect, the learned Counsel of the Assessee referred to the judgement in the case of M/s. Rieter India Private Limited Vs. Assistant Commissioner of Income Tax, Pune [I.T.A. No.1947/PUN/2018, dated 28.04.2022]; wherein the relevant paragraph of the order is extracted as under: “In view of the fact that the item-wise link between the 19 items reflected on page 1180 of the paper book with the corresponding expenditure / provision taken as a part of the operating costs in this / earlier year has not been ingrained, we consider it expedient to set-aside the impugned order and remit the matter to the file of the AO / TPO for undertaking this exercise in order to determine whether the amounts of reversal and credit to the Profit and Loss Account of ‘Provision written back’ amounting to Rs.85.46 lakhs and “Balances written off’ amounting to Rs.134.88 lakhs were earlier included in the operating costs base for the ALP determination of the year of their debit to the Profit and Loss Account. Needless to say, the Assessee will be allowed a reasonable opportunity of hearing in this regard.” ::15 :: I.T.(TP)A No.:48/Chny/2021 7. On the other hand, the learned CIT-DR relied on the order of the learned DRP and the observations of the DRP are reproduced as follows: “1C The Learned TPO erred in considering 'Other Income' as non-operating in nature while computing the operating margins, without taking cognizance of the nature of income and its direct nexus to the operations of the company. The learned TPO erred on facts and circumstances in adopting an inconsistent approach to treat reversal of provisions as non-operating while provision for contract losses was considered as operating in nature. Without prejudice, the Learned TPO erred in disregarding the submissions made by the Assessee that should the provision for contract losses be treated as operating, the same should be distributed over the period of the project (i.e. 3 years) Panel: The contention of the assessee is with regard treating certain items of other income as non-operating. On verification these items are liabilities written back, waiver of trade items and provisions written back. These items relate to expenditure and the operations of earlier years and due to reversal of items they are treated as income. One of the contention of the assessee is that the TPO has not been consistent. It is alleged that the provisions created on expenditure is treated as operating expenditure on one side but the provisions written back are not treated as operating income. In this regard the provision created relates to the operations of the current year based on scientific and structured estimation of provision. These provisions arc generally created year on year basis consistently. However, the written off item do not belong to the operations of the current year but they are reversal entries of earlier year. Further these reversals are not structured but are done from ::16 :: I.T.(TP)A No.:48/Chny/2021 time to time based on certain developments beyond the operations of business. Also, the assessee should not have grievance as the stand taken is applicable for the Assessee as well as the comparables uniformly. Accordingly, the ground is rejected.” 8. We have heard the rival submissions. The details of the other income which is mentioned by the Assessee in the paper-book at Page No.488 [Volume No.2] are duly operating in nature. All the income are related with the business operation of the previous year or of the current year. It is to be directed to the learned Assessing Officer to reconsider the issue in the light of treating the expenses as operating expenses for this assessment year. Thus, this ground of appeal of the Assessee is allowed. 9. Ground No.3 [3.1 to 3.6] : Transfer pricing adjustment at the entity level without restricting the adjustment to the proportion of international transactions: The learned Counsel of the Assessee would like to submit that the learned TPO has erroneously proposed an adjustment of Rs.144.75 crore which is in excess of total value of international transaction in the IPS Segment. The learned TPO in his order has considered the NPM as the PLI to benchmark the arm’s length price of the international transaction relating to the project segment. The calculation is reproduced as under: Particulars Amount (INR) Transaction Revenue (A) 138,73,22,449 Arm’s Length profit @! 4.39% 609,03,455 Arm’s Length cost (B) 132,64,18,993 ::17 :: I.T.(TP)A No.:48/Chny/2021 Actual cost 277,39,31,394 Excess Price 144,75,12,401 Value of International Transaction 71,82,26,805 Adjustment on account of excess price paid in AE Transactions 71,82,26,805 / 277,39,31,394 * 100 = 25.89% 25.89% of 144,75,12,401 37,47,60,960 Arm’s Length Price of the transactions 109,29,87,765 9.1 Based on the analysis, the learned TPO has proposed a downward adjustment to the excess price paid by the Assessee on the merits and receipts of services. While doing so, it is amply clear that the value of adjustment can, at the most, be equivalent to the value of international transaction. As this would itself imply the transaction ought to have been entered into free of cost as per the provisions of Section 92A of the Act. “Any income arising from the international transaction shall be computed having regard to the arm’s length price”. He further mentioned that as per the Rule 10 B(I)(e) of the Income Tax Rules, 1962 (in brevity “the Rules”) provide that the margin release by the Assessee from its international transaction with its Associated Enterprises [AE] needs to be compared to the margin released by the unrelated enterprises from comparable uncontrolled transactions. 9.2 The learned CIT-DR relied on the order of the learned DRP which is extracted as under: “The Learned TPO erred on facts and circumstances of the case in proposing a transfer pricing _ adjustment higher than the value of international transactions. ::18 :: I.T.(TP)A No.:48/Chny/2021 3A.The Learned TPO grossly erred in law and on facts by violating the principles of natural justice and proposing an adjustment of INR 1,447,512,401which is in excess the total value of international transactions (costs and revenue) entered into by the Assessee in the IPS projects segment (INR 1,112,577,971), thereby disregarding the provisions of Section 92C of the Act, read with Rule 10B(J)(e) of the Income Tax Rules, 1962. The Learned TPO grossly erred in violating the principles of natural justice by proposing an adjustment in excess of the total revenue in the JPS segment of the Assessee. 3B. The Learned TPO erred in proposing an adjustment at the entity level, instead of restricting the adjustment to the value of international transactions. Panel: The contentions of the assessee are carefully considered. It is the plea of the assessee that the adjustment should not be done at entity level but restricted only to international transactions in IPS EEC segment. The assessee has purchases from both AEs and non-AEs in this segment. The primary international transaction in the case is the purchase of goods to the extent of Rs. 34.2 I crore as provided by the assessee in the grounds of objections. It is interesting to note that the assessee showed overall margin of loss of (- 12.93%(Adjusted) in IPS EEC segment. The margin from AlE and non-AE transactions is not available. In this regard the the assessee do not maintain the audited segmental results for AE and non-AE transactions. The assessee was asked to explain how such margins are computed and the basis for the same. It is seen that the segmental results were not available when the statutory audit is performed. Further, it was also seen that there were no segmental results when the TP study was conducted by the assessee. The AE Vs. Non-AE results are not provided at any stage of ::19 :: I.T.(TP)A No.:48/Chny/2021 proceedings. From the above facts it is clearly seen that the segmental results are not available. Any impact on the basis of calculation of ALP by MAM (here TNMM) has to be considered as adjustment u/s 92CA und the same cannot be proportionately reduced by considering that a part of the purchases were from non-AE also. Whatever is the reduction in the margin of the assessee vis-a-vis comparables is on account of purchases from AE at inflated price and the same gets considered when ALP is calculated by applying TNMM. Factually the net profit arrived at by the assessee is not at AE-segment level. Even as per TP study of the assessee there is no segregation of profits between the AE transactions and non Factually the net profit arrived at by the assessee is not at AE-segment level. Even as per TP study of the assessee there is no segregation of profits between the AE transactions and non-AE transactions. Hence it is not possible to arrive at net profits for AE and non-AlE ons separately As regards assessee's reliance on decisions of various Courts, the above factual matrix was not same in the cases whose decisions are quoted by the assessee. Hence these decisions cannot be applied to the case of the assessee. Further as observed above, the accounts of the assessee are NOT audited for AE segment and non-AE segment separately and hence the cost allocation between these two segments is not verifiable. 1n the backdrop of the above analysis the adjustment in effect is done only to international transactions while non-AE transactions arc presumed to be arm's length in the absence of segmental data. Even on facts the assessee failed to compute the profits attributable to AE transactions. Considering above factual position, the plea of the assessee to restrict the adjustment to AE-transactions alone is not accepted. The asscssee made an alternate plea that the adjustment be restricted to the AE-transaction. ::20 :: I.T.(TP)A No.:48/Chny/2021 The contention of the assessee is carefully considered. [tis a case where AE transactions arc on both sides, expenditure as well as revenue. Out of total revenue of 138.7 crore the AE revenue is Rs.38 crores. This is apart from 65 crore expenditure (after rectification) and 25 crore other revenue including reimbursements However the adjustment is done only towards cost Hence the contention of the assessee that the TP adjustment be restricted to purchases alone cannot be acceded to. This argument would have some force if the international transactions are only purchases or expenses. When assessee is also having revenue stream from AEs the situation is not the same. Hence the contention of the assessee cannot be acceded to. Ground rejected.” 9.3 We observed the rival submissions and considered the documents available on record. The Assessee filed an objection before the learned DRP which is in the paper-book at Page No.39 to 143 which is kept in the record. The Assessee in two segments; IPS and ACD value of international transaction was Rs.463,783,361 and Rs.185,554,504 respectively. The proportionate value of these projects in IPS segments are 18.41% and ACD 42.71%. The Assessee also liked to highlight that the learned TPO while computing the transfer pricing adjustment had computed the same at segment level, without appreciating the fact that the international transaction was constituted only to a limited component of the total costs of the Assessee in the IPS segment and a limited component of the revenue in ACD segment. So, accordingly the Assessee had purchased raw materials from the AE in 27% of the total raw material purchased, then the adjustment that ALP is to be restricted to 27% of the total ::21 :: I.T.(TP)A No.:48/Chny/2021 turnover. In this respect, respectful observation of the following order of the Co-ordinate Bench of the Tribunal in the case of M/s. Doosan Power Systems India Private Limited [I.T.(TP)A.83/Chny/2018; dated 31.03.2021, the relevant paragraph is reproduced as under: “9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below along with case laws cited by the ld. AR for the assessee. We find that although the assessee has challenged TP adjustment made by the Ld. TPO in light of FAR analysis and comparables, but the Ld. AR for the assessee has restricted his arguments in respect of entity level adjustments made by the Ld. TPO. Therefore, we rest our findings to the issue of entity level adjustment made by the Ld. TPO in light of certain judicial precedence cited by the Ld. AR for the assessee. Admittedly, it is a well settled principle of law by the decision of Hon'ble Supreme Court in the case of CIT vs. M/s. Firestone International Pvt. Ltd. in SLP No.41327/2015, where the Hon'ble Supreme Court has dismissed the SLP filed by the Department and affirmed to the findings of Hon'ble Bombay High Court, where the Hon'ble High Court held that TP adjustments cannot be made beyond the transactions of the assessee with its associated enterprises. The Hon'ble Bombay High Court in yet another case of CIT vs. Tara Jewels Exports Pvt. Ltd. (supra) had also considered identical issue and held that TP adjustments cannot be made at entity level. The ITAT, Chennai in the case of Prodapt Solutions Pvt. Ltd. vs. DCIT in ITA No.566/Chny/2017 has considered an identical issue and held that transfer pricing adjustment has to be made only in respect of transactions of the assessee being a tested party, with associated enterprises after comparing the transactions made by similarly placed company in uncontrolled transactions with non-associated enterprises. The sum and ::22 :: I.T.(TP)A No.:48/Chny/2021 substance of the ratios laid down by Hon'ble Supreme Court and Hon'ble High Courts are that TP adjustment can be made only in respect of transactions of the assessee with its associated enterprises, but not to a third party transactions at entity level. Although the Ld. TPO as well as Ld. DRP have accepted the fact that the issue has been decided in favour of the assessee by various Hon'ble High Courts, but because the SLP filed by the Department has been admitted by the Hon'ble Supreme Court they have proposed adjustment at entity level to keep the issue alive. But fact remains that the SLP filed by the Department has been dismissed by the Hon'ble Supreme Court vide its order dated 31.01.2018 and hence, the issue of TP adjustment at entity level had attain finality by dismissal of SLP filed by the Department by the Hon'ble Supreme Court. Therefore, we are of the considered view that the Ld. TPO as well as DRP has erred in making TP adjustment at entity level. Hence, we direct the Ld. TPO to restrict TP adjustment in respect of international transactions of the assessee with its associated enterprises. The other issue raised by the assessee including comparables selected by the AO and average margins of comparables is not pressed by the Ld. AR for the assessee and hence, there is no requirement of adjudicating the issue at this level.” 9.4 We considered the submissions of both the parties. The adjustment was not made in entity level. The international transaction should be controvert with only with the international transition. The learned TPO should be restricted only in the entity and not beyond. Accordingly, the issue is being setting aside to the learned TPO to further ascertain the costs in both the segments; i.e. IPS and ACD segments, by observing the above discussion. ::23 :: I.T.(TP)A No.:48/Chny/2021 Accordingly, Ground No.3 [3.1 to 3.6] of the Assessee is allowed for statistical purposes. 10. Ground No.5 [5.1 to 5.4] : Adjustment towards international transactions in EEC segment by cherry picking loss making / low margin contracts: The learned Counsel of the Assessee drew our attention to Page No.28 of the paper-book. The Assessee software related services to its AEs. The pricing for the said transaction is based on budgetary hourly rate basis and in case of any inefficiency / inaccuracy in the budget, the same could lead to a loss scenario. This particular ground is related to the segregated approach taken by the learned TPO in software projects which was considered together. Each of the project of the Assessee was in different geographical area. The learned Counsel of the Assessee mentioned that the learned TPO while applying the TNMM method has separately bundled the transactions bundle-wise which are also divided between geographies. He further mentioned that the Assessee has maintained detailed documentation in accordance with Section 92D of the Act r.w.Rule 10D of the Income Tax Rules, 1962 (in brevity “the Rules”). The exhaustive transfer pricing analysis is conducted to determine the ALP of the transactions. Apart from the transfer pricing study, the Assessee had adopted the segmental approach, wherein the IPS segment is bifurcated into J3 and other than J3 and EEC / software segments. The margin earned by the ::24 :: I.T.(TP)A No.:48/Chny/2021 Assessee in the EEC software segment was a benchmark against the comparable companies performing similar functions. He relied on the Circular No.14 of 2021 issued by the CBDT r.w.s.92C(3) of the Act which clearly states that “under the new provisions, the primary onus is on the tax-payer who determines the arm’s length price in accordance with any rules and to substantiate the same with the prescribed documentation. When such onus is discharged by the Assessee and the data used for determining the arm’s length price is reliable and correct, there can be no intervention by the Assessing Officer. 10.1 The learned Departmental Representative only relied on the order of the DRP. 10.2 We have heard both the parties and relied on the documents available on record. The Assessee had filed an objection before the learned DRP which is kept at Page Nos.88 to 95 of the paper-book [Volume No.1]. During the TPO study, the learned TPO had made a cherry picking. The ALP study closely linked transactions is to be taken into account considering the geographical and segmental attitude. The segment wise study was not done properly. The Assessee mainly wanted to point out that in this case, this particular software segments should be dealt with relating to comparables and accordingly the filter should be settled. We hereby ::25 :: I.T.(TP)A No.:48/Chny/2021 direct that the matter be remitted back to the learned TPO by considering the segments taking into consideration the comparables. The project is based on the budgetary hourly basis but in case of inefficiency and inaccuracy in the budget, the same could lead to a loss scenario. So, the EEC / software segment should be viewed in a holistic manner and needs to be a benchmark together for the purpose of comparability. So, the fact should be taken care at net segmental level. However, the Assessee should get a reasonable opportunity to substantiate their issue. In the result, Ground No.5 [5.1 to 5.4] of the Assessee is allowed for statistical purposes. 11. Ground No.6 [6.1 to 6.3]: Adjustment towards losses incurred in the ACD segment: In this issue, the learned Counsel of the Assessee mentioned that during the year, the Assessee continued to incur losses in the ACD segment considering unfavorable market conditions. The reasons are underutilization of capacity and initial year of operations, price constraints and market demand and low yielding. The refrigeration components industry faced significant downtrend in financial year and the segment failed to generate revenues as anticipated. 11.1 The Assessee reported loss margin of 1.27% from the operations carried out in this segment. The Assessee had withdrawn the comparables using three years data. But the learned TPO ::26 :: I.T.(TP)A No.:48/Chny/2021 depending on the comparables chosen by the Assessee for the ACD division had calculated from the margin / arithmetic mean to 12.3% and accordingly calculated the ALP and the adjustment was made at the entity level to Rs.669,98,131/-. The Assessee had filed objection which is referred at Page Nos.102 to 109 of the paper-book [Volume- I]. 11.2 The learned Departmental Representative relied on the order of the learned DRP and this particular objection cannot be accepted. The reason behind this is that the Assessee has not brought on record any cogent, relevant and reliable evidence to prove that the data for the preceding two years revealed facts, which could have an influence on the determination of the ALP. The existence of any product / economic / business cycle affecting the performance of the Assessee and those of the comparables has not been documented for, by the Assessee. As per the learned DRP, the Assessee had only given general statements to substantiate its claim that the use of multiple year data affects the data for the year under consideration and accordingly the ground of the Assessee was rejected by the DRP. 11.3 We have considered the rival submissions and relied on the documents available on record. It is a fact that in this year, the Assessee had incurred losses in the ACD segment. But the Revenue ::27 :: I.T.(TP)A No.:48/Chny/2021 authorities are not satisfied about the documentation and the data provided by the Assessee. The Assessee should another reasonable opportunity to substantiate its claim before the learned TPO. So, the matter is being setting aside to the learned TPO for further consideration. In the result, Ground No.6 [6.1 to 6.3] is allowed for statistical purposes. 12. Ground No.7 [7.1 to 7.4]: Adjustment towards recovery of expenses, alleging mark-up based on travel companies: This particular ground is recovery of expenses alleging mark-up based on travel companies amounting to Rs.57,96,070/-. The learned Counsel of the Assessee mentioned that this is reimbursement in group adjustment mark-up reimbursements from the AEs. This is back to back expenses and there is no value addition but only cost to cost was incurred. The extract from the order of the learned DRP which is in Page No.9 is extracted as under: “Recovery of Expenses – Adjustment INR 57,656,884/- 1H. The learned TPO erred on facts and circumstances in incorrectly considering the amount of recovery of expenses as INR 254,443,444 instead of the actual transaction amount of INR 191,011,174. 1I. The learned TPO erred in law and on facts and circumstances by considering the entire amount of recovery of expenses in the cost base of both projects and EEC segments, thereby proposing a double adjustment. ::28 :: I.T.(TP)A No.:48/Chny/2021 Panel: The above two grounds relate to recovery of expenses. The Assessee preferred rectification petition before the TPO on the issue and the TPO passed rectification Order which covers ground 111 above. Hence, no adjudication is required on the issue of 1H.” 12.1 Here the issue is already for further adjudication and rectification. So, we are inclining to the order of the learned DRP. In the result, Ground No. 7 [7.1 to 7.4] of the Assessee is dismissed. 13. Ground No. 10 [10.1 to 10.4] : Disallowance of shared service expenses: This particular expenses is called by the learned Counsel of the Assessee as shared service expenses amounting to Rs.212,00,000/-. This is purely a technical service. The AE had provided learning system to the Assessee. The service is managerial in nature. Accordingly, the learned Counsel of the Assessee stated that taxability in India depends on the residential status of the tax payer. As per Section 6(3) read with Section 2(26) of the Income Tax Act, a company is said to be a resident in India in any of the following situations: (a) It is an Indian Company; [or] (b) The control and management of its affairs during the year is situated wholly in India. Accordingly, the Assessee submits that Invensys USA is a company incorporated in USA with its control and management wholly outside India. Therefore, Invensys, USA would be treated as a non-resident under the provisions of the Income Tax ::29 :: I.T.(TP)A No.:48/Chny/2021 Act. The learned Counsel of the Assessee relied on the judgement of the Hon’ble Delhi High Court in the case of J.K. (Bombay) Limited Vs. CBDT reported in [1979] 118 ITR 312. 13.1 The learned DRP had discussed the issue which is annexed at Page No.15 of the order, extracted as under: “6.0 Objection No.5: The Learned AO erred on facts and circumstances in disallowing payment of shared service expenses to Invensys USA amounting to INR 21,200,000 on account of non-deduction of taxes under section 195 of the IT Act. 5A.The Learned AO has erred in law and on facts in concluding that lax is required to be deducted on payments made towards shared service expenses to Invensys USA amounting to INR 21,200,000. 5B. The Learned AO has failed to appreciate that the subject payment does not involve rendition of any services which is technical or consultancy in nature and that no technical knowledge, experience, skill, know-how, or processes is being made available. 5C.The Learned AO failed in appreciating that the subject payment does not fall within the definition of Fees for Included Services as per the India- ::30 :: I.T.(TP)A No.:48/Chny/2021 USA DTAA and hence liability to withheld taxes 011 such payments does not arises. Panel: The assessee contends that the disallowance of Rs.2.12 crore u/s 40(a)ia) is not correct. From the order of AO it is seen that assessee reported payment in foreign currency to M/s Invensys Inc USA for software and network support services. The assessee failed to deduct TDS u/s 195. In this regard it is seen the assessee took the pica before AO that it is before AAR for A Y 2010-11 on the issue, and the same is pending before the DRP the assessee has not relied on this argument. It is contended before DRP that these payments are not fee for technical services within Indo-US DTAA and hence there is no liabilities to deduct tax. Firstly, this argument is not taken before AO. Even otherwise the software/network support services are clearly within the domains of technical services and tax is deductible. Hence, the disallowance u/s.40(a)(ia) is correctly done. Ground Rejected.” 14. We have heard both the parties and relied upon the documents available on record. As per the written submission submitted, kept at Page Nos.127 to 139 of the paper-book [Volume No.I] of the Assessee, discussed details in favour of his arguments. The AAR in the case of Invensys Systems Inc. reported in [2009] 317 ITR 438 (AAR) has held that most of the services carried out by the Assessee are in the nature of managerial services which are out ::31 :: I.T.(TP)A No.:48/Chny/2021 of the purview of FIS Article, as per India-USA DTAA. The entire purpose of the activities undertaken is to give directions or guidance to the group companies so that they can adopt or follow standard procedures and by virtue of such managerial intervention, common benefit accrues to the affiliated companies which will consequently increase their level of performance. Accordingly, the payments made would not attract withholding taxes in India. 14.1 The same view was taken by the Hon’ble ITAT, Mumbai Benches in the case of Raymond Limited [2003] 86 ITD 791 (Mum.) and the respectful observation of the order of the Hon’ble Mumbai High Court in the case of Diamond Services International Private Limited reported in [2008] 304 ITR 201 has held that “experience means knowledge or practical wisdom gained from what one has observed, encountered or undergone. Where the consideration is not for use or right to use, the experience but for application of experience, the same cannot be construed to make available of technology / services.”. 14.2 Accordingly, the Tax Deducted at Source [TDS] u/s.195 of the Act is not applicable in this transaction. So, the Assessee further submitted a copy of the Income Tax Returns of Invensys Systems Inc., USA for the Assessment Year 2014 – 2015 filed on 25.11.2014. ::32 :: I.T.(TP)A No.:48/Chny/2021 Accordingly, Ground No.10 [10.1 to 10.4] of the Assessee is allowed. In the result, this ground of appeal of the Assessee is allowed. 15. The Assessee had also filed a Stay Application Petition bearing No.38/Chny/2022 for the Assessment Years 2014-2015. As the appeal petition in I.T.(TP)A. No.48/Chny/2021 is adjudicated and the matter set aide to the learned AO. Thus, the Stay Application bearing No.38/Chny/2022 is disposed of and is rejected accordingly. 16. In the result appeal of the Aseessee bearing IT(TP)A.48/Chny/ 2021 is partly allowed. Order pronounced in the court on 17 th June,2022at Chennai. Sd/- Sd/- (जीमंजूनाथा) (G. MANJUNATHA) लेखा सद /ACCOUNTANT MEMBER (अिनके श बनज ) (ANIKESH BANERJEE) ाियकसद एवं /JUDICIAL MEMBER चे(ई/Chennai, िदनांक/Dated, the 17 th June, 2022 IA, Sr. PS आदेशकी*ितिलिपअ,ेिषत/Copy to: 1. अपीलाथ /Appellant 2. *-थ /Respondent 3. आयकरआयु. (अपील)/CIT(A) 4. आयकरआयु./CIT 5. िवभागीय*ितिनिध/DR 6. गाड3फाईल/GF