MTU India Pvt.Ltd,, Pune v. Deputy Commissioner of Income-tax, Circle - 14,, Pune

ITA 157/PUN/2018 | 2013-2014
Pronouncement Date: 05-03-2021 | Result: Partly Allowed

Appeal Details

RSA Number 15724514 RSA 2018
Assessee PAN AABCD2233N
Bench Pune
Appeal Number ITA 157/PUN/2018
Duration Of Justice 3 year(s) 1 month(s) 18 day(s)
Appellant MTU India Pvt.Ltd,, Pune
Respondent Deputy Commissioner of Income-tax, Circle - 14,, Pune
Appeal Type Income Tax Appeal
Pronouncement Date 05-03-2021
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 05-03-2021
Date Of Final Hearing 03-03-2021
Next Hearing Date 03-03-2021
Last Hearing Date 25-09-2019
First Hearing Date 21-01-2021
Assessment Year 2013-2014
Appeal Filed On 16-01-2018
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C PUNE BEFORE SHRI R.S. SYAL VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY JUDICIAL MEMBER . / ITA NO.157/PUN/2018 / ASSESSMENT YEAR : 2013-14 MTU INDIA PRIVATE LIMITED 159/1 TATHAWADE PUNE-MUMBAI HIGHWAY PUNE 411 033 PAN : AABCD2233N VS. DCIT CIRCLE-14 PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 08-11-2017 PASSED BY THE ASSESS ING OFFICER (AO) U/S.143(3) R.W.S.144C(13) OF THE INCOME-TAX ACT 1961 (HEREINAFTER CALLED THE ACT) IN RELATION TO THE ASSESSMENT YE AR 2013-14. 2. THE ASSESSEE HAS RAISED THE FOLLOWING ADDITIONAL GROUNDS: NOT RESTRICTING THE TRANSFER PRICING ADJUSTMENT TO THE PROPORTIONATE VALUE OF INTERNATIONAL TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISES. THE AO/DRP ERRED IN NOT GRANTING THE APPELLANT DEDUCTION OF `EDUCATION CESS ON INCOME-TAX AND `SECONDARY AND HIG HER EDUCATION CESS ON INCOME-TAX WHILE COMPUTING THE APPELLANTS TOTAL INCOME FOR THE YEAR UNDER CONSIDERATION. ASSESSEE BY SHRI KETAN VED REVENUE BY SHRI SANGRAM GAIKWAD DATE OF HEARING 03-03-2021 DATE OF PRONOUNCEMENT 05-03-2021 ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 2 3. THE HONBLE SUPREME COURT IN NATIONAL THERMAL POWER COMPANY LTD. VS. CIT (1998) 229 ITR 383 (SC) HAS OBSERVED THAT THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TA XING AUTHORITIES IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF FOR EXAMPLE AS A RESULT OF A JU DICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUN AL IT IS FOUND THAT A NON-TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUC TION IS DENIED WE DO NOT SEE ANY REASON WHY THE ASSESSEE SHOU LD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESP ECT OF THAT ITEM. ANSWERING THE QUESTION POSED BEFORE IT IN AFFIRMATIVE THEIR LORDSHIPS HELD THAT ON THE FACTS FOUND BY THE AUTHORITIES BELOW IF A QUESTION OF LAW ARISES (THOUGH NOT RAISED BEFORE THE AUTHOR ITIES) WHICH HAS BEARING ON THE TAX LIABILITY OF THE ASSESSEE THE TR IBUNAL HAS JURISDICTION TO EXAMINE THE SAME. 4. HAVING GONE THROUGH THE SUBJECT MATTER OF THE ADDITIONAL GROUNDS TAKEN BY THE ASSESSEE IT IS DISCERNIBLE THAT THEY RA ISE PURE QUESTIONS OF LAW. WE THEREFORE ADMIT THE SAME. 5. THE FIRST ASSAIL BY THE ASSESSEE IN ITS MEMORANDUM OF A PPEAL IS TO THE TRANSFER PRICING ADJUSTMENT OF RS.4 28 63 019/- MAD E BY THE AO IN DISTRIBUTION ACTIVITY DESCRIBED AS ESAS (ENGINE SALE SPAR ES SALE AND AFTER-SALE SERVICE). ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 3 6. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSE E IS A TOGNUM GROUP COMPANY A WHOLLY OWNED SUBSIDIARY OF TOGN UM ASIA PTE LTD. SINGAPORE (FORMERLY KNOWN AS MTU ASIA PTE LTD .). THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MARKETING AND DISTRIBUTION OF MTU DETROIT DIESEL AND MERCEDES BENZ (OFF HIGHWAY) DIESEL ENGINES AND SPARE PARTS INCLUDING ASSOCIATED EQUIPMENTS. THE ASSESSEE FILED ITS RETURN DECLARING TOTAL INC OME OF RS.7.48 CRORE. CERTAIN INTERNATIONAL TRANSACTIONS WERE REPOR TED IN FORM NO. 3CEB. THE AO MADE A REFERENCE TO THE TRANSF ER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) O F THE INTERNATIONAL TRANSACTIONS. THE TPO OBSERVED THAT THE ASSESSEE AGGREGATED THE INTERNATIONAL TRANSACTIONS RELATING TO DISTRIBUTION DIVISION (ESAS) AND ENGINEERING DIVISION (EARC) AND HAD APPLIE D THE TRANSACTIONAL NET MARGINAL METHOD (TNMM) ACCORDINGLY. WITHOUT DISPUTING THE SELECTION OF THE TNMM AS THE MOST APPROPRIATE METHOD HE SEGREGATED ENGINEERING SERVICES SEG MENT FROM THE DISTRIBUTION SEGMENT FOR BENCHMARKING. INSTANTLY W E ARE CONSIDERING TRANSFER PRICING ADJUSTMENT IN THE DISTRIBUTION ACTIVITY . THE ASSESSEE SELECTED CERTAIN COMPARABLE COMPANIES AND TRIE D TO DEMONSTRATE WITH THE HELP OF MULTIPLE-YEAR DATA THAT THE PRICE CHARGED BY IT WAS AT ALP. THE TPO REQUIRED THE ASSESSEE TO FURNISH SINGLE YEAR MARGIN OF THE COMPARABLES. AS AGAINST TEN COM PANIES ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 4 CHOSEN BY THE ASSESSEE THE TPO AFTER CERTAIN ALTERATION S BROUGHT DOWN THE NUMBER OF COMPARABLES TO NINE AND COMPUTED THEIR MEAN PROFIT LEVEL INDICATOR (PLI) - OPERATING PROFIT (OP)/OPERATING REVENUE (OR) - AT 8.15%. THE TPO OBSERVED FROM THE AS SESSEES FINAL ACCOUNTS THAT COMMISSION REVENUE ON INDENT SALES INCLUDE D `PRIOR PERIOD INCOME OF RS.5 65 08 314/-. HE HELD THAT S UCH PRIOR PERIOD INCOME WAS NOT LIABLE TO BE INCLUDED IN THE OPERATING REV ENUE OF THE ASSESSEE COMPANY FOR BENCHMARKING. ACCORDINGLY HE COMPUTED THE ASSESSEES PLI AT (-) 2.95%. THIS LED TO THE TRANSFER PRICING ADJUSTMENT OF RS.4 80 08 677/-. THE ASSESSEE C HALLENGED THE WORKING DONE BY THE TPO BEFORE THE DISPUTE RESOLUTION PANEL (DRP). CERTAIN DIRECTIONS WERE GIVEN BY THE DRP. HOWEVER NO REPRIEVE WAS ALLOWED ON THE QUESTION OF EXCLUSION OF PRIOR P ERIOD COMMISSION INCOME OF RS.5.65 CRORE. WHILE GIVING EFFECT TO T HE DIRECTIONS THE TPO VIDE HIS LETTER DATED 07-11-2017 ADDRESSE D TO THE AO WORKED OUT THE AMOUNT OF TRANSFER PRICING ADJUSTMEN T AT RS.4.28 CRORE WITH SEVEN COMPARABLES AND THEIR FRESH ME AN ADJUSTED PROFIT MARGIN AT 6.96%. THE ASSESSEE IS BEFORE THE TRIBU NAL URGING INTER ALIA THAT PRIOR PERIOD COMMISSION INCOME OUGHT TO HAVE BEEN INCLUDED IN THE OPERATING REVENUES OF THE ASSESSEE. 7. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE R ELEVANT MATERIAL ON RECORD. IT IS SEEN THAT THE INTERNATIONAL TRANSACTION S ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 5 UNDER THE DISTRIBUTION DIVISION COMPRISE OF PURCHASES FROM ASSOCIATED ENTERPRISES WHICH WERE SOLD TO NON-AES; RECEIPT O F COMMISSION ON SALE OF THE AES PRODUCTS IN INDIA; RECEIPT OF INCOME ON RENDERING GLOBAL PROCUREMENT SERVICES; AND INCO ME FROM RENDITION OF WARRANTY SERVICES. HERE AGAIN THE DISPUTE IS C HIEFLY QUA THE RECEIPT OF COMMISSION ON SALES AMOUNTING TO RS.13 83 56 599/- WHICH IS FURTHER RESTRICTED TO A SUM O F RS.5.65 CRORE INCLUDED IN THE ABOVE AMOUNT THAT WAS DESIGNATED AS PRIOR PERIOD INCOME IN THE ANNUAL ACCOUNTS OF THE ASSESSEE. TH IS AMOUNT WAS TAKEN BY THE ASSESSEE AS A PART OF THE OPERATING REV ENUE BUT EXCLUDED BY THE TPO. THE TRANSACTION OF DEPICTION OF `PRIOR PE RIOD COMMISSION INCOME OF RS.5.65 CRORE IS A CONSEQUENCE OF THE ASSESSEE CHANGING REFERENCE POINT FOR RECOGNIZING COMMISS ION INCOME ON SALES FROM THAT OF RECEIPT OF CREDIT NOTES FROM G ROUP COMPANIES AFTER THEIR RECEIPT OF PAYMENT FROM THE CUSTOMERS IN THE EARLIER YEARS TO THE RAISING OF INVOICES BY THE AES NAMELY BEFORE RECEIVING PAYMENTS OR ISSUING CREDIT NOTES IN THE YEAR UNDER CONSIDERATION. DETAIL OF RS.5.65 CRORE HAS BEEN SET OUT A T PAGES 431 TO 433 OF THE PAPER BOOK. THE FIRST TRANSACTION HAS CUSTO MER NAME OF INDIAN NAVY; AES INVOICE NO. FOR SALE OF GOODS; DATE OF SALE OF GOODS (01-11-2010); AMOUNT OF SALE IN INDIAN RUPEES AT RS.22 305/-; CREDIT NOTE NUMBER; AND DATE OF RECEIPT OF CR EDIT NOTE ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 6 (20-06-2012). ON A SPECIFIC QUERY THE LD. AR STATED THAT THE ASSESSEE WAS NOT RAISING ANY BILLS OR DEBIT NOTES ON RENDER ING MARKETING SUPPORT SERVICES. IT WAS ONLY THE AE WHICH WAS IS SUING CREDIT NOTES AT THE TIME OF ACCRUAL OF INCOME TO THE ASSESSEE IN TERMS OF THE AGREEMENT. FROM THIS YEAR THE ASSESSEE STARTED RE COGNIZING INCOME AT THE TIME OF RAISING OF INVOICES BY THE AES. THE F IRST TRANSACTION GOT CONCLUDED ON RECEIPT OF CREDIT NOTE IN 20.6.2 012 FOR WHICH THE INVOICE WAS RAISED BY THE AE ON 1.11.2010 THE A SSESSEE RECOGNIZED CORRESPONDING COMMISSION INCOME IN THIS YEAR. AS THE EVENT OF RAISING INVOICE BY THE AE GOT ALREADY OVER IN THE YE AR 2010 AND THE INCOME WAS NOT RECOGNIZED EARLIER BECAUSE THE CRED IT NOTE WAS NOT RECEIVED AS PER THE PAST PRACTICE THE ASSESSEE RE CORDED COMMISSION INCOME IN THE CURRENT YEAR BY TREATING IT AS `PRIOR P ERIOD INCOME. SIMILAR IS THE POSITION OF ALL THE TRANSACTIONS ON THES E THREE PAGES GIVING TOTAL OF RS.5.65 CRORE. INVOICES IN ALL SUCH C ASES WERE RAISED BY THE AES IN EARLIER YEAR(S) BUT THE CREDIT NOTES W ERE RECEIVED IN THE YEAR UNDER CONSIDERATION. NOW THE CASE O F THE ASSESSEE IS THAT SUCH COMMISSION INCOME OF RS.5.65 CRORE SHOULD BE INCLUDED IN ITS OPERATING REVENUE BASE IN DETERMINING THE ALP O F THE TRANSACTION OF RENDERING MARKETING SUPPORT SERVICES UNDER TH E OVERALL DISTRIBUTION SEGMENT. ON THE OTHER HAND THE DEPARTME NT HAS ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 7 MADE OUT A CASE THAT PRIOR PERIOD INCOME CANNOT BE CONSIDER ED AS A PART OF THE OPERATING REVENUE FOR THE CURRENT YEAR. 8. AT THIS STAGE IT IS PERTINENT TO NOTE THAT THE ASSESSEE A DOPTED THE TNMM AS THE MOST APPROPRIATE METHOD FOR THIS TRANSACTION WH ICH HAS NOT BEEN DISPUTED BY THE TPO. IN ORDER TO PROPERLY A PPRECIATE THE RIVAL CONTENTIONS IT WOULD BE APT TO TAKE NOTE OF THE PRES CRIPTION OF RULE 10B(1)(E) OF THE INCOME-TAX RULES 1962 GOVERNIN G THE ALP DETERMINATION UNDER THE TNMM 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 A N ASSOCIATED ENTERPRISE IS CO MPUTED 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; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELA TED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES IF ANY BETWEEN THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIO NS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS WHICH COULD MATERIALLY AFFE CT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 8 9. IT CAN BE SEEN FROM THE ABOVE THAT SUB-CLAUSE (I) O F RULE 10B(1)(E) DEALS WITH DETERMINATION OF THE ASSESSEES NET PRO FIT MARGIN REALIZED FROM AN INTERNATIONAL TRANSACTION. THEREAFTER THE NET PROFIT MARGIN REALIZED BY THE COMPARABLES IS FOUND OUT WH ICH IS ADJUSTED ON ACCOUNT OF DIFFERENCES. BY CONSIDERING SUCH A DJUSTED OPERATING PROFIT MARGIN OF THE COMPARABLES AND THAT OF THE AS SESSEE THE ALP OF THE INTERNATIONAL TRANSACTION IS DETERMINED. THUS THE SUB-CLAUSE (I) AS A FIRST STEP IN THE ENTIRE PROCESS REQU IRES DETERMINING THE OPERATING PROFIT MARGIN OF THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION WHICH MEANS THAT ALL THE OPERATING COSTS QUA THE INTERNATIONAL TRANSACTION ARE TO BE REDUCED FROM ALL THE OPERATING REVENUES OF THE INTERNATIONAL TRANSACTION. EXTANTLY WE ARE CONCERNED WITH THE OPERATING REVENUE COMPONENT. THE REQUIR EMENT IS TO CONSIDER ALL THE ITEMS OF THE OPERATING REVENUE OF THE INTERNATIONAL TRANSACTION. ANY ITEM OF REVENUE WHICH IS NOT IN RELATION TO THE INTERNATIONAL TRANSACTION GOES OUT OF RECKONING IN THE ALP DETERMINATION. ONE CAN FIND OUT WHETHER OR NOT A PAR TICULAR ITEM OF OPERATING REVENUE IS IN RELATION TO THE INTERNATIONAL TRANSACTION OF RENDERING SERVICE BY FIRST IDENTIFYING THE SCO PE OF THE INTERNATIONAL TRANSACTION. SUCH SCOPE CAN BE EASILY ASCERTAINED FROM THE AGREEMENT UNDER WHICH THE SERVICE REQUIRING ALP ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 9 DETERMINATION WAS RENDERED. THE AGREEMENT SPELLS OUT AS TO WHEN THE SERVICE COMMENCES AND GETS COMPLETED. ONLY THEREAFTE R THE PROCESS OF DISCOVERING THE OPERATING REVENUE/COSTS QUA SUCH SCOPE OF THE INTERNATIONAL TRANSACTION CAN BE UNDERTAKEN. THERE AR E TWO FACTORS GERMANE TO THE ALP. ONE IS THE TIME AT WHICH THE ALP OF THE INTERNATIONAL TRANSACTION IS TO BE DETERMINED AND SECOND IS T HE COVERAGE OF THE PERIOD FOR INCLUDING THE OPERATING COSTS/R EVENUE IN THE ALP DETERMINATION. INSOFAR AS THE TIMING IS CONCERNED IT H AS TO BE ON THE COMPLETION OF THE TRANSACTION WHEN INCOME ACCRUES . BUT FOR THE COVERAGE OF THE PERIOD FOR THE ALP DETERMINATION IT IS THE PERIOD OF CONTINUATION OF THE INTERNATIONAL TRANSACTION AND NOT TH E YEAR IN WHICH IT GETS COMPLETED. THUS IT IS MANIFEST THAT THE CRITERION FOR QUALIFYING AS OPERATING REVENUE/COSTS AND THEN ENTERING INTO THE ALP DETERMINATION IS THE SCOPE OF THE INTERNATIONAL TRANSACTION AND NOT THE PER SE YEAR OF COMPLETION OF THE INTERNATIONAL TRANSACTION. IF A TRANSACTION COMMENCES AND COMPLETES IN A S INGLE YEAR THEN THERE CAN BE NO QUESTION OF INCLUDING THE PRIOR P ERIOD EXPENSE OR INCOMES IN THE ALP DETERMINATION. IF HOWEVER V ARIOUS STEPS OF AN INTERNATIONAL TRANSACTION OF RENDERING SERVICE BRE ACH ONE ACCOUNTING YEAR THEN IT BECOMES INCUMBENT TO CONSIDER ALL THE OPERATING REVENUE/COSTS SPREADING OVER MORE THAN ONE YEAR FOR DETERMINING ITS ALP AT THE TIME OF COMPLETION OF THE TRANSACTION. IN ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 10 SUCH A CASE WHEN THE INTERNATIONAL TRANSACTION GETS CONCLUDED IN YEAR TWO THEN THE COSTS/REVENUE OF THE INTERNATIONAL TRANSACTIO N FROM YEAR ONE ALSO QUALIFY FOR CONSIDERATION IN DETERMINING TH E ALP EVEN THOUGH CHARACTERIZED AS `PRIOR PERIOD COSTS/REVENUE. A METHOD OF ACCOUNTING EMPLOYED BY AN ASSESSEE FOR COMPUTING TOTAL INCOME NEEDS TO BE HARMONIOUSLY ALIGNED MODIFIED AND FINE-TUNED FO R THE LIMITED PURPOSE OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION SO AS TO COMPLY WITH THE PRESCRIPTION OF RULE 10 B(1). IN THIS MANNER IF CERTAIN OPERATING REVENUE/COSTS DO NOT FIT INTO THE SCHEME OF THE METHOD THEY REQUIRE EXCLUSION AND VICE-VERSA . THE COROLLARY IS THAT THE OPERATING REVENUE/COSTS EARNED/INCURRE D BY AN ASSESSEE IN THE YEAR UNDER CONSIDERATION OR AN EARLIER YE AR WHICH RELATE TO THE CURRENCY OF INTERNATIONAL TRANSACTION UNDER CONSIDERATION WARRANT INCLUSION AND THOSE NOT RELATING TO IT SHO ULD BE EXCLUDED. RAISON DETRE FOR EXCLUSION OF ANY ITEM OF OPERATING COST/REVENUE FROM THE COST/REVENUE BASE IS NOT THAT IT DOES NOT PERTAIN TO THE YEAR OF COMPLETION OF THE TRANSACTION OF RENDER ING SERVICE WHEN THE ALP IS BEING DETERMINED BUT THAT IT IS NOT IN RELATION TO THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION. 10. THE DISPUTE REVOLVES AROUND RS.5.65 CRORE WHICH IS COMMISSION INCOME EARNED BY THE ASSESSEE ON TRANSACTIONS O F RENDERING MARKETING SERVICES FOR WHICH THE CREDIT NOTES WER E ISSUED ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 11 BY THE AES DURING THE YEAR UNDER CONSIDERATION BUT INVOICE S WERE RAISED IN EARLIER YEAR(S). IN ORDER TO APPRECIATE THE INCLUSIO N OR OTHERWISE OF THE AMOUNT OF RS.5.65 CRORE IN THE OPERATING R EVENUE BASE WE NEED TO EXAMINE IF IT IS IN RELATION TO THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION. THIS CAN BE DONE BY EXAMIN ING THE SCOPE OF THE TRANSACTION FROM THE AGREEMENT UNDER WHICH SU CH SERVICES WERE RENDERED. A COPY OF THE SAME HAS BEEN P LACED ON RECORD. THE AGREEMENT DATED 01-10-2010 IS BETWEEN THE A SSESSEE (CALLED HEREIN AS SALES REPRESENTATIVE) AND ITS AE TOGNUM AG (CALLED HEREIN AS COMPANY). OBLIGATIONS OF THE SALES REPRESENTATIVE (ASSESSEE) HAVE BEEN SET OUT IN PART II WHIC H PROVIDE THAT THE ASSESSEE WILL PURSUE THE INTEREST OF ITS AE BY ACTIVELY DEVELOPING BUSINESS BETWEEN ITS AE AND THIRD PARTIES. CLAUSE (11) OF PART II OF THE AGREEMENT IS QUITE MATERIAL FOR US WHICH STATE S THAT THE : S ALES REPRESENTATIVE WILL ASSIST PRINCIPAL (S) IN PLACING AND HANDLING ORDERS UNTIL ALL PAYMENTS DUE AND PAYABLE WILL HAVE B EEN MADE BY THE CUSTOMERS . PART III OF THE AGREEMENT CONCERNS WITH `SALES COMMISSIONS. CLAUSE (4) OF PART III STATES THAT TH E: ` SALES REPRESENTATIVE WILL NOT RECEIVE A SALES COMMISSION OR OTHER COMPENSATION IF. . . . . (C) THE CUSTOMER IS UNABLE TO MAKE PAYMENTS. CLAUSE 7 OF PART III OF THE AGREEMENT STATES THAT: `SALES ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 12 COMMISSIONS WILL BE PAID IN THE CURRENCY OF THE FINAL CONTRACT AND WILL BE DUE WITHIN THIRTY DAYS AFTER RECEIPT OF CUSTOMER PAYMENTS . 11. ON GOING THROUGH THE ABOVE EXTRACTED CLAUSES FROM THE AGREEMENT IT BECOMES OSTENSIBLY CLEAR THAT THE SCOPE OF THE INTERNATIONAL TRANSACTION OF RENDERING MARKETING SERVICES BROA DLY COMMENCES WITH THE DOING OF BACKGROUND WORK FOR SALE AS A STEP ONE FOLLOWED BY ACTUAL SALE AS A STEP TWO AND ENDING WITH TH E REALIZATION OF THE INVOICE VALUE BY THE AE FROM THE INDIAN CUSTOMERS AS A STEP THREE. IT IS ONLY ON THE COMPLETION OF THE STEP THREE THAT THE INTERNATIONAL TRANSACTION OF RENDERING MARKETING SUPPORT SERVICES COMES TO AN END RESULTING INTO ACCRUAL OF INCOME THEREFROM AND THE CONSEQUENTIAL ALP DETERMINATION. THUS ALL THE OPERATING COSTS/REVENUE PERTAINING TO THE ABOVE BROAD ACTIVITIES RUNNING INTO THREE STEPS LEADING TO THE INTERNATIONAL TRANSACTION OF RENDERING MARKETING SUPPORT SERVICES ARE TO BE CONSIDERED FOR DETERMINING ITS ALP UNDER RULE 10B(1)(E). TO PUT IT DIFFERENTLY ONLY THE COSTS/REVENUE WHICH ARE EITHER ANTERIOR TO THE STEP ONE O R EXTERIOR TO THE STEP THREE NEED TO BE IGNORED. 12. THE ASSESSEE RECEIVED CREDIT NOTES WORTH RS.5.65 CRORE FOR RENDERING MARKETING SUPPORT SERVICES WHICH GOT CONCLUDED ON THE REALIZATION OF SALES VALUE AND THE CONSEQUENTIAL ISSUANCE OF TH E CREDIT NOTES BY THE AES IN THE YEAR UNDER CONSIDERATION WHIC H IS ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 13 STEP THREE AS DISCUSSED ABOVE. THUS WE HAVE NO HESITATION IN HOLDING THAT SUCH AN AMOUNT IS LIABLE TO BE INCLUDED IN THE OPER ATING REVENUE BASE OF THE TRANSACTION FOR ITS ALP DETERMINATION S UBJECT TO DISCUSSION IN THE IMMEDIATELY THREE SUCCEEDING PARAS OF THIS ORDER. 13. IT IS SEEN FROM THE REPRODUCTION OF THE ASSESSEE S WITHOUT PREJUDICE SUBMISSION BEFORE THE DRP THAT IF IT HAD NOT CHANGE D THE REFERENCE POINT AND CONTINUED TO RECORD COMMISSION INCOME ON THE BASIS OF RECEIPT OF CREDIT NOTES FROM AES AS IT WAS DONE IN EARLIER YEARS THEN ITS COMMISSION INCOME WOULD HAVE BEEN RS.10.8 1 CRORE AS AGAINST TOTAL COMMISSION INCOME RECOGNIZED IN THE ACCOUNTS AT RS.13.83 CRORE (INCLUDING RS.5.65 CRORE IN DISPUTE) BECAU SE CREDIT NOTES WORTH RS.3.02 CRORE WERE NOT RECEIVED BY 31-03-20 13. 14. WE HAVE HELD SUPRA THAT COMMISSION INCOME ON THE COMPLETION OF THE INTERNATIONAL TRANSACTION OF RENDERING MARKETING SUPPORT SERVICES NAMELY THE STEP THREE ON ISSUANCE OF C REDIT NOTE BY THE AE NEEDS TO BE INCLUDED IN THE OPERATING REVENUE B ASE FOR DETERMINING ITS ALP. THE RATIONALE IS THAT THE INCOME IS TO BE RECOGNISED ON PERFORMING THE LAST STEP FALLING WITHIN THE SCOP E OF THE MARKETING SUPPORT SERVICE. NOW IF THE SUM OF RS.3.02 CRORE REPRESENTS THE CREDIT NOTES NOT ISSUED BY AE DURING THE YEA R THE SAME EX FACIE NEEDS TO BE EXCLUDED FROM THE TOTAL COMMISSION OF RS.13.83 CRORE BECAUSE THE ISSUANCE OF CREDIT NOTES COINC IDES WITH ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 14 THE COMPLETION OF THE ABOVE REFERRED STEP THREE AND NON-ISS UANCE OF CREDIT NOTE MAY BE AN INDICATOR OF THE TRANSACTION NOT GETTING COMPLETED DURING THE YEAR. HOWEVER BEFORE EXCLUDING IT ONE NEEDS TO ASCERTAIN IF THE CREDIT NOTES WERE NOT ISSUED BECAUSE THE TRANSACTION OF RENDERING MARKETING SERVICES ITSELF WAS INCOMPLE TE ON THE YEAR ENDING NAMELY STEP THREE WAS YET TO BE FULLY OR P ARTLY PERFORMED ON ONE HAND OR THAT THE ASSESSEE COMPLETED ALL THAT WAS REQUIRED FROM IT NAMELY THE PAYMENT WAS ALSO RECEIVED B Y THE AE BUT THE AE FAILED TO TIMELY ISSUE THE CORRESPONDING CREDIT NOTE S IN TERMS OF THE AGREEMENT. COMMISSION INCOME IN SUCH FIRST SC ENARIO CANNOT BE INCLUDED IN THE OPERATING REVENUE BASE AND WOULD REQUIRE EXCLUSION AS THE INCOME HAS NOT ACCRUED INASMUCH AS THE TR ANSACTION ITSELF IS INCOMPLETE. BUT THE COMMISSION INCOME IN SUCH SECOND SCENARIO WILL BE INCLUDED IN THE OPERATING REVENUES BECAUSE THE TRANSACTION OF RENDERING MARKETING SERVICES IS OVER AND THE RESULTANT INCOME HAS ACCRUED. THIS EXERCISE NEEDS TO BE DONE BY TH E AO/TPO. 15. ONCE WE ARE OBLIGED TO INCLUDE THE ABOVE REFERRED COMMISSION IN THE REVENUE BASE THAT WAS CHARACTERIZED BY THE ASSESS EE AS `PRIOR PERIOD INCOME THE SEQUITUR IS THAT IN THE SAME WAY ALL THE OP ERATING COSTS DIRECT OR INDIRECT; CLOSE OR REMOTE - IN RELATION TO SUCH INTERNATIONAL TRANSACTION INCURRED IN EARLIER YEARS SHOULD ALSO B E ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 15 INCLUDED IN THE COST BASE FOR DETERMINING THE ALP OF THE TRANSA CTION IN THE CURRENT YEAR. THE OBVIOUS REASON IS THAT ALL THE OPER ATING COSTS/REVENUE IN RELATION TO THE INTERNATIONAL TRANSACTION NEED TO BE CONSIDERED AT THE TIME OF DETERMINING THE ALP OF THE INTERNATIONA L TRANSACTION. IT IS CLEAR FROM THE DETAILS OF RS.5.65 CRORE GIVEN BY THE ASSESSEE THAT IT CARRIED OUT THE ABOVE REFERRED FIRST TWO STEP S OF RENDERING MARKETING SUPPORT SERVICES IN THE EARLIER YEARS WHICH IS EVIDENCED FROM THE FACT THAT THE INVOICES WERE RAISED BY THE AES IN PRECEDING YEARS. A FORTIORI ALL THE OPERATING COSTS INCURRED BY THE ASSESSEE IN EARLIER YEARS ON SUCH RENDITION OF SERVICES AR E ALSO REQUIRED TO BE INCLUDED IN THE OPERATING COST BASE WHILE DETE RMINING THE ALP OF THE TRANSACTION ON ITS COMPLETION IN THE YEAR UNDER CONSIDERATION. NECESSARY DETAILS IN RESPECT OF THE COMMISSION INCOME OF RS.3.02 CRORE AS DISCUSSED IN THE EARLIER PARA AND THE AMOUNT OF OPERATING EXPENSES INCURRED IN PRECEDING YEARS TOWARDS THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION ARE WANTING. W E THEREFORE SET-ASIDE THE IMPUGNED ORDER AND DIRECT THE AO /TPO TO DECIDE THE ISSUE ACCORDINGLY. 16. THE LD. AR OBJECTED TO TWO COMPARABLES NOT ON THEIR IN CLUSION BUT ON THE DETERMINATION OF THEIR PLI. THE FIRST IS CUPRUM BA GRODIA LTD. WHOSE OP/OR WAS TAKEN BY THE TPO AT 18.33%. THE ASS ESSEE CONTENDED BEFORE THE DRP THAT THE CALCULATION OF THE PLI WAS NO T ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 16 CORRECT INASMUCH AS THIS COMPANY WAS INTO TWO BUSINESS SEG MENTS NAMELY TRADING SEGMENT AND MINING SEGMENT AND ONLY THE TR ADING SEGMENT WAS TO BE CONSIDERED AS COMPARABLE. AS AGAINST THA T THE TPO HAD COMPUTED THE PLI BY TAKING ENTITY LEVEL FIGURES. THE DRP ON PAGE 13 DIRECTED THE AO TO CONSIDER THE SEGMENTAL DATA. WHILE GIVING EFFECT TO THE DIRECTION OF THE DRP THE TPO IN HIS LETTER TO TH E AO TOOK ADJUSTED PLI OF THIS COMPANY AT 6.12%. THE CASE OF THE ASSESSEE IS THAT THE PLI OF THIS COMPANY IS 0.50%. UNDER TH ESE CIRCUMSTANCES WE DIRECT THE AO/TPO TO VERIFY THE CONTENTION OF THE ASSESSEE AND ADOPT THE CORRECT PLI OF CUPRUM BAGRODIA L TD. 17. THE SECOND COMPANY IS GEORGE OAKES LIMITED. THE TPO ADOPTED THE PLI OF THIS COMPANY AT 5.45%. THE DRP OBSERVED THAT THE TPO COMPUTED OPERATING PROFIT BY ALSO CONSIDERING NON- OPERATING REVENUE AND COSTS. WHILE GIVING EFFECT TO THE DIREC TION OF THE DRP THE TPO DETERMINED PLI OF THIS COMPANY AT 4.77%. T HE CASE OF THE ASSESSEE IS THAT THE PLI OF THIS COMPANY SHOULD BE (-) 0.22%. THE AO/TPO IS DIRECTED TO VERIFY THE ASSESSEES CON TENTION AND ADOPT CORRECT PLI WHILE DETERMINING THE ALP. 18. THE NEXT ISSUE URGED ON BEHALF OF THE ASSESSEE IS THAT THE TPO DID NOT APPLY CORRECT TURNOVER FILTER. IN THIS REGARD IT IS SE EN THAT THE TPO APPLIED A PARTICULAR TURNOVER FILTER WHICH WAS MODIFIED BY THE DRP IN PARA 11.2.3 OF ITS DIRECTION. THE AO WHILE GIVING EFF ECT TO ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 17 THE DIRECTION OF THE DRP INADVERTENTLY OVERLOOKED THE SAME. THE AO IS DIRECTED TO COMPLY WITH THE DIRECTION GIVEN BY THE DRP. 19. THE ASSESSEE HAS RAISED AN ADDITIONAL GROUND URGIN G THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE RESTRICTED TO THE INTERNATIO NAL TRANSACTION ALONE. SUCH AN ADDITIONAL GROUND HAS BEEN ADMITTED ABOVE. 20. SECTION 92 IS THE FIRST SECTION OF THE CHAPTER-X CONTAINING SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX. SUB-SECTION (1) OF SECTION 92 PROVIDES THAT: `ANY INCOME ARISING FROM AN INTERNATIO NAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENG TH PRICE. THUS IT IS GRAPHICALLY CLEAR THAT THE ALP AND THE CONSEQUENTIAL TRANSFER PRICING ADJUSTMENT ARE CONTEMPLATED ON LY IN RESPECT OF THE INTERNATIONAL TRANSACTIONS AND NOT THE ENTITY LEVE L TRANSACTIONS. THE TPO IN THE INSTANT CASE COMPUTED TRANSFER PRICING ADJUSTMENT IN RESPECT OF ENTITY LEVEL TRANSACTIONS. WE DIRECT TO RESTRICT IT TO THE AE TRANSACTIONS UNDER CONSIDERATION AND NOT TH E ENTITY LEVEL TRANSACTIONS. 21. TO SUM UP WE SET ASIDE THE IMPUGNED ORDER ON AL P DETERMINATION OF THE INTERNATIONAL TRANSACTIONS OF THE `DISTRIBUTION ACTIVITY AND RESTORE THE MATTER TO THE FILE OF THE AO/TPO FOR A FRESH DETERMINATION OF THE ALP IN ACCORDANCE WITH OUR ABOVE ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 18 OBSERVATIONS/DIRECTIONS. NEEDLESS TO SAY THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING. 22. THE TPO INITIALLY PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.95 97 343/- IN HIS ORDER PASSED U/S.92CA(3) IN THE IN TERNATIONAL TRANSACTION OF `ENGINEERING DIVISION (EARC). GIVING EFFECT TO THE DIRECTION GIVEN BY THE DRP NIL ADJUSTMENT HAS BEEN WORKED OUT IN THIS INTERNATIONAL TRANSACTION. THUS THE GROUNDS CHALLENGING THE TRANSFER PRICING ADDITION IN RESPECT OF THIS INTERNATIONAL TRANSA CTION HAVE BECOME ACADEMIC NOT REQUIRING ANY SPECIFIC ADJUDICATIO N AT OUR END. 23. THE SECOND ADDITIONAL GROUND IS ABOUT DEDUCTION OF E DUCATION CESS ON INCOME TAX AND SECONDARY AND HIGHER EDUCATION C ESS ON INCOME TAX FOR THE YEAR UNDER CONSIDERATION. 24. WE FIND THAT THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN SESA GOA LT. VS. JCIT (2020) 423 ITR 426 (BOM.) IN WHICH IT HAS BEEN HELD THAT EDUCATION CESS IS NOT DISALLOWABLE EXPENDITURE U/S.40(A)(II) OF THE ACT. SIMILAR VIEW HAS EARLIER BEEN TAKEN BY THE HONBLE RAJAS THAN HIGH COURT IN CHAMBAL FERTILISERS AND CHEMICALS LTD. AND ANOTHER VS. JCIT (2018) 102 CCH 0202 (RAJ-HC). WE DIRECT TO ALLOW DEDUCTION FOR SUCH AN AMOUNT AFTER VERIFICATION. ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 19 25. IN THE RESULT THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 05 TH MARCH 2021. SD/- SD/- ( PARTHA SARATHI CHAUDHURY ) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 05 TH MARCH 2021 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13 PUNE 4. 5. 6. THE PR.CIT-V PUNE / DR C ITAT PUNE; / GUARD FILE. / BY ORDER // TRUE COPY // SENIOR P RIVATE SECRETARY / ITAT PUNE ITA NO.157/PUN/2018 MTU INDIA PRIVATE LIMITED 20 DATE 1. DRAFT DICTATED ON 03-03-2021 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 05-03-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *