Mahle Behr India Pvt. Ltd. Vs DCIT (ITAT Pune)
Facts- The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of air conditioning systems and its part and also components thereof for its customers viz. Indica Car of Tata Motors Limited and Mahindra and Mahindra since 1999. The return of income for the assessment year 2012-13 was filed on 30.11.2012 disclosing total income of Rs.9,58,15,960/-. The appellant company also reported some international transactions.
The appellant company also submitted transfer pricing study report wherein, the appellant had adopted TNM Method as most appropriate method in respect of some transactions and CUP Method as the most appropriate method in respect of other transactions. The appellant also computed the margins of the company by adopting Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI). On noticing of the above international transactions, the AO referred the matter to the TPO for the purpose of benchmarking the international transactions u/s 92CA(1) of the Act.
The TPO suggested upward ALP adjustments of Rs.2,86,90,000/- in respect of international transactions and also suggested upward adjustment of Rs.1,80,65,636/- in respect of software license fees as against the total expenditure of Rs.7,04,59,511/-. Therefore, the TPO suggested upward adjustments of Rs.4,67,55,636/- vide order dated 18.01.2016.
On receipt of the TPO’s order, the Assessing Officer passed draft assessment order dated 29.03.2016 passed u/s 143(3) r.w.s. 144C(1) of the Act making addition on account of TP adjustments of Rs.4,67,55,636/-, disallowance of weighted deduction u/s 35(2AB) of Rs.3,38,82,341/- and disallowance on account of Product Development Expenses treated as capital expenditure of Rs.1,74,00,000/-.
Being aggrieved, the appellant company filed objection before the ld. DRP. However, the ld. DRP confirmed various adjustments.
On receipt of the directions of the ld. DRP, the Assessing Officer passed the final assessment order vide order dated 19.01.2017 after making TP adjustments of Rs.3,01,18,021/-, disallowance of weighted deduction u/s 35(2AB) of Rs.3,38,82,341/- and disallowance on account of product development expenses treated as capital expenditure of Rs.1,46,47,500/-.
Being aggrieved by the order of final assessment, the appellant is in appeal before us
Conclusion- It is settled law that the filter of 75% of the export to total turnover is most appropriate filter. In these circumstances, we confirm the action of the lower authorities from excluding this company from the list of the comparables. Similarly, the company ‘Cades Digitech Pvt. Ltd.’ had been excluded the TPO/ld. DRP from the list of comparables by recording a finding that this company is engaged in off shore operations. These findings remain uncontroverted. A company engaged in on-site operations is incomparable with assessee which is engaged in off shore operations as the business model is totally different. Therefore, we uphold the orders of the lower authorities in excluding this company from the list of the comparables.
As regards to the issue of disallowance of expenditure incurred on in-house R&D facility, we find that this issue is covered by the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for the earlier assessment year 2011-12 in ITA No.624/PUN/2018, order dated 31.08.2021, wherein, it was held by the Tribunal that Since the R&D facilities for which the assessee incurred costs outside India are neither of the assessee nor approved by the prescribed authority, there can be no question of granting any weighted deduction on the expenses incurred outside India.
Following the decision of the Tribunal in assessee’s own case for the assessment year 2011-12, we hold that the expenditure incurred on product development expenses is “revenue expenditure”.
FULL TEXT OF THE ORDER OF ITAT PUNE
This is an appeal filed by the assessee directed against the final assessment order dated 19.01.2017 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (‘the Act’) for the assessment year 2012-13.
2. At the outset, the there is a delay of 11 days in filing the present appeal. The ld. AR for the assessee filed an affidavit stating that the delay in filing the present appeal was not intentional and beyond the control of the assessee. The relevant part of the said affidavit is reproduced hereunder :-
“………….
3. The impugned order of assessment passed by the assessing officer u/s 143(3) r.w.s. 144C(13) for the A.Y. 2012-13 was served on the assessee company on 23rd January 2017 and accordingly the due date for filing of appeal before Hon ITAT was 22nd March 2017.
The only female employee looking after taxation matters of the assessee company fell ill and was unwell from 9th March 2017 until 24th March 2017 and proceeded on leave. The CFO of the company had to travel to Germany to attend to some important and urgent matter in relation to the company restructuring and legal matters. Assessee company being corporate entity has to necessarily act only through human agency. In the midst of flurry of activities and the absence of the concerned staff looking after the taxation matters the due date for filing the appeal before the Hon’ble ITAT came to be lost sight of and the appeal papers came to be not filed within the stipulated period. If the concerned employee single handedly looking after the tax matters and working under aforesaid overwhelming circumstances inadvertently overlooks the last date of filing the appeal it would amount to a reasonable cause so far as the assessee company is concerned.
On the backdrop of the aforesaid facts and circumstances it is manifest that there was just and sufficient cause for the delay due to an inadvertent error and there was no negligence or deliberate inaction on our part.
……………”
3. Considering the above submissions of the ld. AR and no objection from the side of ld. DR for condoning the delay, we find it is a fit case to condone the delay of 11 days and admit the appeal for adjudication.
4. The appellant raised the following grounds of appeal :-
“Being aggrieved by the assessment order passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act,1961 finalised by the learned Deputy Commissioner of Income Tax, Circle 8, Akurdi, Pune (AO) as per the directions of the learned Dispute Resolution Panel-3,Mumbai(DRP) in the case of MAHLE Behr India Private Limited (the appellant), the appellant submits following grounds which are without prejudice to each other for Your due and sympathetic consideration:
I. TP issues:
1. The learned DRP and AO erred in making upward adjustment of Rs. 2,86,90,000/- to the export prices charged by the appellant in respect of appellant’s international transactions viz. rendering of IT enabled design engineering services to its associated enterprise/s (AE).
Against thrusting of and inclusion of so called external comparables in the peer set
2. The learned DRP and the AO/TPO, in making the upward adjustment to the ALP erred in disregarding appellant’s objections to the thrusting of external entities as comparables.
3. The learned DRP and the AO erred in imposing upon the appellant eClerx Services Ltd., Pentamedia Graphics Ltd., Tata Elxi Ltd. and Genesys International Corporation Ltd. as so called external comparables companies for benchmarking purposes when none of the said comparables satisfied the basic comparability criteria laid down in Rule 10 B (2) viz. functions performed, risks assumed and assets employed and the size of the comparables vis-a-vis the appellant. The learned authorities erred in forcing the said companies as comparables, by putting them under the category of KPO, without appreciating the fact that the appellant was not a KPO company and was only a restricted scope service provider of design engineering services for car air conditioners and components thereof in automotive segment.
Against exclusion of external comparables selected consistently by the appellant
4. The learned DRP and the AO further erred as follows in excluding the external uncontrolled comparables selected by the appellant
