UL India Pvt. Ltd. Vs DCIT (ITAT Bangalore)
The next issue relates to the addition made rejecting the claim of change in method of revenue recognition. The Ld A.R fairly admitted that this issue has been decided against the assessee by the co-ordinate bench in AY 2009-10 (referred supra). We notice that this issue has been decided against the assessee by the coordinate bench in AY 2009-10 with the following observations:-
“36. We have considered the rival submissions and are of the view that the conclusion of the DRP in this regard deserves to be upheld. It is no doubt true that the Assessee is at liberty to change the method of accounting provided the change in the method of accounting is bonafide and is being consistently followed subsequently. But the method followed by the Assessee in the present case of postponing revenue recognition without postponing the cost incurred for earning the revenue cannot be said to be proper. There is no valid explanation for claiming expenses related to the CAS services rendered by the Assessee when recognition of income there from is postponed. The change in the method of accounting was therefore not bonafide and was rightly rejected by the revenue authorities. We find no merit in the claim of the Assessee in this regard. The cases cited by the learned counsel for the Assessee are with regard to the right of an Assessee to change the method of accounting provided it is bonafide and is followed subsequently. Therefore the case laws cited are not discussed. Suffice it to say that the principle laid down in those cases are not applicable to the present case in view of the finding that the change in the method of accounting was not bonafide and proper. Gr.No. 15 to 18 are therefore dismissed. As far as Gr.No.19 raised by the Assessee which is to the effect that if the income recognition which is postponed in this year is considered as revenue for the current year, then the AO should allow consequential benefit in the subsequent year in which the same income has been offered to tax, we are of the view that the Assessee is at liberty to pursue remedies available to it in law and the AO shall consider the same in accordance with law and in the light of the findings as above.”
Following the above said order of the co-ordinate bench, we decide this issue against the assessee. Accordingly, the addition made by the AO is confirmed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Both the appeals filed by the assessee are related to assessment year 2012-13.
2. At the time of hearing, the Ld. A.R. submitted that the A.O. had passed a rectification order u/s 154 of the Income-tax Act,1961 [‘the Act’ for short] after passing of the final assessment order for assessment year 2012-13. In the original assessment order, the AO did not give effect to the directions given by Ld Dispute Resolution Panel (DRP) and the same was given effect to in the rectification order passed u/s 154 of the Act. Hence, out of abandoned caution, the assessee has preferred appeals against both the orders. The appeal filed against the order dated 31.1.2017 passed u/s 154 of the Act is numbered as IT(TP)A No.651/Bang/2017. The appeal numbered as IT(TP)A No.627/Bang/2017 is directed against the final assessment order dated 31.1.2017 passed by the A.O. He submitted that the issues contested by the assessee in both the appeals are identical in nature.
3. In view of the above discussed facts, one of the appeals shall become infructuous. Since the demand has been enhanced in the order passed u/s 154 of the Act, we adjudicate the grounds urged therein and accordingly dismiss the appeal numbered as IT(TP)A No.627/Bang/2017 as infructuous.
4. The Ld. A.R. has furnished notes to arguments. According to the same, all the grounds urged by the assessee relate to the following issues:-
a) Transfer Pricing adjustment under “Certification service segment”.
b) Transfer Pricing adjustment under “ITES segment”.
c) Addition on account of change in the method of revenue recognition
d) Denial of TDS credit.
e) Non-granting of depreciation on foreign exchange loss.
5. The assessee is an Indian company and is a subsidiary of M/s. Underwriters Laboratories Inc., U.S.A. The assessee herein provides product safety testing and certification services. The above said services have been titled as “Conformity Assessment Services”. The functions performed by the assessee have been described as under by TPO:-
“Certification Services: The Conformity Assessment Services (“CAS”) Unit in UL India provides the product testing and quality and safety certification services to the manufacturers as an independent service provider. The contracts to provide services to Indian clients are entered into by UL India with the clients. In case, UL India does not have the requisite equipment and technical expertise, it subcontracts the functions of testing of product samples and undertaking audits according to prescribed guidelines and standards set by UL Inc., to another entity in UL Group, which has the necessary capability as well as capacity to conduct the testing and engineering review activity. UL India pays subcontracting charges to the respective UL entity at cost plus a mark-up of 5%. On successful completion of the testing services, UL India issues the certification to the client. UL India pays royalty at 5% of the revenue to UL Inc for the use of UL mark for certification purposes. However, based on the capability and capacity of UL India or other UL Group entities also subcontract the testing and certification work to UL India. In such cases, UL India gets compensated t cost plus a mark-up of 15%.”
6. Besides the above, the assessee has also provided IT enabled services to its Associated Enterprises. The A.O. made Transfer pricing adjustment of Rs.17.40 crores in respect of Certification service segment and Rs.26.14 lakhs in respect of ITES segment aggregating to Rs.17.66 lakhs. After the DRP’s direction, the aggregate amount of transfer pricing adjustment came to be enhanced to Rs.25.46 crores. The assessee is challenging above said TP adjustments made in both the segments.
7. With regard to Transfer Pricing adjustment made in respect of Certification Service Segment, the Ld A.R submitted that an identical issue was examined by the co-ordinate bench in the assessee’s own case in AY 2009-10 in IT(TP)A No.291/Bang/2014 dated 20-09-2019 and the matter was restored back to the file of AO/TPO with a set of directions for examining is afresh.
8. We heard Ld D.R on this issue and perused the record. We notice that the co-ordinate bench has restored an identical issue in AY 2009-10 to the file of AO/TPO with following observations:-
“14 We have heard the rival submissions. The ld. counsel for the assessee submitted that the law with regard to treating foreign exchange loss/gain as part of operating profit/loss has been well settled in several decisions and in this regard relied on the decision of ITAT Bangalore Bench in the case of SAP Labs India (P) Ltd. (supra). He submitted that the TPO while computing Profit Level Indicator (PLI) of the assessee in the certification services segment, has included certain items of expenses, whereas the assessee has excluded those expenses as being extra-ordinary in nature and not having impact on the operating margin of the assessee. These objections, however, were not met by the DRP, despite submissions made by the assessee before the DRP. Thirdly, it was submitted that as far as Bangalore Benches of the Tribunal are concerned, the threshold limit for application of RPT filter for excluding comparable companies, should be 15% of the total revenue being with related parties and in this regard placed reliance on the decision rendered in 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) wherein it has been held that comparables having RPT of up to 15% of total revenues can be considered as comparable company. Fourthly, it was submitted that the adjustment and addition to the total income should be made u/s. 92 of the Act only in respect of international transaction and not in respect of transactions with Non-AE. In this regard, the ld. counsel pointed out that out of the total revenue from certification services of Rs.30.57 crores, only 10.19 crores was transactions with AE and therefore the adjustment should be reflected only to the transactions of AE and not the entire transaction. Lastly, it was submitted that foreign exchange loss/gain to the extent it relates to the capital account, should not be included as part of the operating profit/loss.
15. The ld. DR submitted that no details of foreign exchange loss on account of capital or revenue items is available nor has the ld. counsel for the assessee pointed out any instance of foreign exchange loss/gain on account of capital transactions which was considered as operating expense. With regard to the RPT filter, the ld. DR submitted that the RPT filter has to be applied to all the comparable companies chosen ultimately and not only to the comparable companies the inclusion of which the assessee objects. As far as the plea of the assessee to restrict determination of ALP only to the comparables, the ld. DR pointed out that in carrying out the certification services the assessee had sub-contracted part of the work to the AE and paid Rs.3,60,48,227. It has to be examined as to whether such a payment will have any impact on the payments received by the assessee from AE for rendering certification services.
16. We have given a careful consideration to the rival submissions and are of the view that the issue with regard to determination of ALP in the certification services segment should be remitted back to the TPO. Accordingly, the issue is restored back to the TPO for fresh consideration with the following directions:-
(1) The foreign exchange loss/gain to the extent it relates o revenue items and are directly related to certification services rendered by the assessee should be considered as part of the operating profit or loss, as the case may be. The law in this regard is well settled by the decision rendered by the ITAT Bangalore Bench in the case of SAP Labs (supra) and Auto Desk India Pvt. Ltd. Vs. DCIT IT(TP)A.No.540 & 541/Bang/2013.
(2) The TPO should restrict the addition only in respect of international transactions with the AE. However, the submission made by the ld. DR with regard to a part of the certification services having been subcontracted to the AE and receipt of sub-contracting charges from the AE to the extent the same will have impact on the consideration received from the AE for rendering the certification services should also be examined by the TPO.
(3) Errors, if any, in the computation of margins of comparables should be looked into by the TPO in the set aside proceedings.
(4) Threshold limit for applying RPT filter should be 15% or 25% of sales depending upon the availability of comparable co mpanies after all exclusions as held by the Tribunal in the case of Auto Desk India Pvt. Ltd. Vs. DCIT [2018] 96 com 263 (Bang.Trib.) [para 24 to 25].
17. The above directions will be sufficient to take care of the grievances projected by the assessee in ground Nos. 5 & 6 and additional grounds No.6 (d), 26 & 27. The TPO will afford opportunity of being heard to the assessee before deciding the issue.”
9. We also notice that the decision rendered by the co-ordinate bench in AY 2009-10 has been followed by another co-ordinate bench in the assessee’s own case in AY 2013-14 in IT(TP)A No.2/Bang/2018 dated 25.02.2021. Accordingly, following the decisions rendered by the co-ordinate benches, we restore this issue to the file of AO/TPO with similar directions.
10. The next issue contested by the assessee relates to the Transfer pricing adjustment made in respect of ITES segment. Rejecting the TP study of the assessee, the TPO selected following ten comparable companies:-
