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Lear Automotive India P. Ltd. E-25, 26, 27, Bhosari MIDC, Pune-411026. Vs. ACIT Circle 4(1), New Delhi.
December, 25th 2014
                DELHI BENCH: `I' NEW DELHI


                     I.T.A .No. 5612/Del/201
                    Assessment Year : 2007-

Lear Automotive India P. Ltd.         Vs.         ACIT
E-25, 26, 27, Bhosari MIDC,                       Circle 4(1),
Pune-411026.                                      New Delhi.

 (Appellant)                                      (Respondent)

                Assessee by : Shri Rohit Tiwari, CA &
                              Shri Anubhav Rastogi, Advocate.
                Revenue by : Shri Peeyush Jain, CIT, DR &
                              Shri Vivek Kumar, Sr. DR


     This appeal by the assessee is directed against the final

order passed by the Assessing Officer (AO) on 5.10.2011 u/s

143(3) read with section 144C of the Income-tax Act, 1961,

(hereinafter also called `the Act') in relation to the Assessment

year 2007-08.

2.1. First issue raised in this appeal is against the addition on

account    of   Transfer   pricing   adjustment    made     for   the

international transaction of `Cost allocation from associated

                                                   ITA No.5612/Del/2011

2.2. Briefly stated the facts of the case are that the assessee is

a subsidiary of Lear Corporation USA, which holds the entire

share capital of the assessee-company through its affiliate viz.,

Lear Corporation (Mauritius) Ltd. The assessee is primarily

engaged in the manufacture/assembly of automotive seating

systems (i.e. seats and seat trims) and interior parts. The

assessee provides design and engineering support services

along with embedded software development support services

to group companies, and design and engineering services to

automotive industry customers, like General Motors Ltd. and

Mahindra   &   Mahindra    (M&M).   Apart   from   certain     other

international transactions, the assessee reported a payment of

Rs.1,99,22,532/- to its Associated Enterprises (AEs) towards

`Cost allocation'. On a reference being made by the AO, the

Transfer Pricing Officer (TPO) noticed that the assessee had

paid certain allocated costs to group companies.         On being

called upon to explain of nature of such payment, the assessee

stated that these costs primarily related to certain softwares

used by it and could be broadly classified into two parts. First

part was stated to be the costs relating to pre-loaded desktop

software on some of the computers of the assessee company

                                                ITA No.5612/Del/2011

as well as the costs of their maintenance. The assessee

submitted that the cost for such desktop softwares and their

maintenance were incurred by the group companies on a per

computer basis to third parties and charged to the assessee on

the same basis. The second part of such overall costs was

stated to be the costs relating to the maintenance costs for

certain CAD/CAE softwares used by it, the licenses for which

were owned by group companies. Out of the total licenses, the

group companies set aside a fixed number of licenses as per

the request of the assessee for its use, for which annual

maintenance charges were paid to third parties software

vendors on a per license basis. The assessee claimed that all

the costs allocated by group companies to the assessee

represented the amounts paid by group companies to third

parties depending on the actual utilization of softwares by the

assessee. The assessee sought to benchmark this international

transaction on the basis of Comparable Uncontrolled Price

(CUP) method under which the price paid by the group

companies to the third parties was considered as a comparable

instance. The TPO treated such payments as towards intra-

group services and observed that the deduction could be

                                                   ITA No.5612/Del/2011

allowed only when the factum of the assessee having actual

received such services was proved. In the absence of the

assessee providing any details of invoices and other back-up

documents to show that such payments actual represented

reimbursement of costs incurred by the group companies to the

third parties, the TPO held that the arm's length price (ALP) of

this transaction was to be taken as Nil. The assessee remained

unsuccessful before the DRP. That is how, an addition of

Rs.1,99,22,532/- was made in the final order passed by the AO,

against which the assessee is aggrieved before us.

2.3.   We have considered the rival submissions and perused

the relevant material on record. It is observed from the TPO's

order that the instant issue was also there in the preceding

year. A useful reference can be made to para 5.2 of the TPO's

order in which he observed that similar TP adjustment was also

made in the preceding year. The ld. AR submitted that for such

immediately   preceding   year,   the   assessee   placed      some

additional evidence before the Tribunal indicating that the

payment made to its foreign AEs represented a simple

reimbursement of cost incurred by them to third parties. It can

be seen from page 21 para 5.1 of the combined tribunal order

                                                    ITA No.5612/Del/2011

dated 18.12.2013 passed for the Assessment years 2005-06,

2006-07 & 2008-09 that there is some discussion about the

assessee moving an application under rule 29 of the ITAT Rules,

1963 seeking permission for filing additional evidence for

consideration. After going through the entire gamut of the

available material, but without commenting on such additional

evidence, the Tribunal restored the entire issue to the TPO for

taking a fresh decision in accordance with law.

2.4.   Both the sides before us are in agreement that the facts

and circumstances for the instant year are mutatis mutandis

similar to those of the preceding year. It can be seen that for

this year also, the assessee has moved an application under

rule 29 of the ITAT Rules seeking to file some additional

evidence. Without going into the merits of this issue and

respectfully   following   the   precedent,   we   set   aside     the

impugned order on this score and send the matter back to

TPO/AO for a fresh decision as per law after allowing a

reasonable opportunity of being heard to the assessee.

Needless to say, the assessee will be at liberty to file any fresh

evidence before the authorities in such de novo examination.

                                                  ITA No.5612/Del/2011

3.1. The next issue raised before us is against the addition of

Rs.1,85,75,701/- on account of Transfer pricing adjustment for

international transaction of `Cost Recharges'. The facts of this

ground are that the assessee incurred certain costs/expenses

through group companies towards third parties and reimbursed

the same on cost to cost basis. On being show caused to

explain the character of this international transaction, the

assessee stated that these expenses were in the nature of

reimbursement of salary costs of expatriate personnel deputed

to the assessee on full time basis, rent and other miscellaneous

expenses. The assessee's explanation that such costs were

charged by group companies to the assessee without any

mark-up was found by the TPO to be not substantiated with any

evidence such as, sample copies of debit notes raised by AEs

on the assessee, copies of ledger accounts showing the booking

of relevant expenses/invoices in the assessee's books of

account and other relevant documents, despite necessary time

allowed for doing the needful. In this backdrop of the facts, the

TPO held that the said payment was unjustified and accordingly

took the ALP of this transaction at Nil. This resulted into an

                                                 ITA No.5612/Del/2011

addition of Rs.1.85 crore. The assessee is aggrieved against

this addition.

3.2. After considering the rival submissions and perusing the

relevant material on record, it is noticed that the assessee

failed to furnish the relevant documents called for by the TPO

to corroborate its explanation. It can be noticed that the

assessee tried to file certain details in this regard before the

DRP vide its letter dated 5.8.2011, a copy of which is available

on page 4 to 6 of the paper book. Such details appear to have

escaped the attention of the DRP. It was claimed that Shri

Ratindra R. Puri was sent by its foreign AE as Managing Director

of the assessee-company, whose salary etc. was paid through

its foreign AE and the same was reimbursed as such without

any mark-up. Since the necessary details in this regard were

not filed before the TPO and the DRP also chose not to

comment upon the same, we are of the considered opinion that

the ends of justice would meet adequately if the impugned

order on this issue is also set aside and the matter is restored

to the file of TPO/AO. We order accordingly and direct them to

decide this issue afresh as per law after allowing the

reasonable opportunity of being heard to the assessee. No part

                                                  ITA No.5612/Del/2011

of the discussion made above should be construed as our view

on the correct nature of the real transaction and allowability or

otherwise of this amount. Here again, we clarify that the

assessee will be at liberty to lead any fresh evidence in support

of the deduction and simultaneously the AO will also be entitled

to examine any aspect on this matter before reaching final

conclusion about deductibility or otherwise of this expenditure.

4.1.   The only other issue which remains in this appeal is

against the addition of Rs.1,90,92,020/- on account of TP

adjustment in IEC Segment.

4.2. Briefly stated, the facts of this ground are that the TPO

observed    that   the   assessee    was    providing    software

development services to its AE under this segment.              The

assessee determined the ALP of this transaction by applying

TNMM as the most appropriate method with Profit Level

Indicator (PLI) of Operating Profit / Total Cost (OP/TC).       The

assessee showed its PLI at 10.86% against the average PLI of

certain comparables on the basis of multiple year data at

12.74%.    That is how, the assessee demonstrated that this

international transaction was at the ALP.      The TPO did not

approve the application of multiple year data.     After making

                                                     ITA No.5612/Del/2011

certain   inclusions   and   exclusions   in/from     the     list    of

comparables, the TPO selected 26 companies as comparable

which have been listed on pages 157 and 158 of his order. By

considering the arithmetic mean margin of these comparables

(after allowing working-capital adjustment) at 24.46%, the TPO

computed adjustment to the tune of `1,90,92,020/-.            That is

how the addition was made,       against which the assessee is

aggrieved before us.

4.3. We have heard the rival submissions and perused the

relevant material on record. At the outset, we want to make it

clear that the assessee has only assailed the inclusion of

fourteen companies in the list of comparables by contending

that their functional profile is different.   Apart from that no

other aspect of the TP adjustment has been challenged.               As

such, we will confine ourselves only to examining as to whether

the companies so challenged are, in fact, comparable or not.

4.4. Before   embarking      upon   the   exercise      of    making

comparison, it is crucial to first consider the nature of work

done by the assessee under this segment. On the entity level,

the assessee has two factories in Nasik, one factory in Halol,

one factory in Chennai, one Programme Administration Office in

                                                     ITA No.5612/Del/2011

Pune and one Engineering Centre at Thane.             Whereas the

`Factories' are engaged in the manufacture of seats for various

motor car companies, Indian Engineering Centre (IEC) at Thane

is engaged in providing design and engineering support mainly

to its group companies in respect of automotive seating,

systems and interiors. It is this IEC segment, with which we are

presently concerned.      The support under this segment is

provided mainly to group companies by helping them in

rendering design and engineering services to their customers.

The assessee does not have any communication with the

ultimate customers of its group companies. Various stages in

the overall provision of design and engineering services by Lear

Group to its customers, are as under:-

     a)   Understanding     of    the     detailed   requirements/

          specifications of the customer.

     b)   Based on the above, conceptualise the designs.

     c)   Based on the specifications and the conceptualised

          design framework, create/prepare the designs.

     d)   Once the designs are created/prepared and finalised,

          they   are   tested    and    simulated.    Testing      and

                                              ITA No.5612/Del/2011

     simulation is essentially done to ensure proper

     functioning    of     the   product     when     all     its

     components/parts are assembled.

e)   The designs are then approved by the customer.

f)   Once the designs are approved, prototypes are made

     as per the designs.

g)   The prototypes are tested for functionality, and the

     same are then approved by the customer.

h)   Once the prototypes are approved, the tools and

     moulds to be used in the manufacturing process of

     each component, are manufactured. These tools and

     moulds are manufactured by suppliers (could be

     domestic or overseas), and in their selection, Lear

     Group may provide necessary assistance to the

     customer.     The costs of manufacturing these tools

     and moulds are borne by the customer. Further, Lear

     Group    may        co-ordinate   and    oversee        the

     manufacturing of these tools an moulds.

i)   Subsequent to the manufacture of tools and moulds,

     they are approved by the customer.         Using these

                                                             ITA No.5612/Del/2011

               tools and moulds, samples are manufactured by the

               supplier and provided to the customer for approval.

        j)     Having     put     the    samples      manufactured         into

               application,     the   customer     may     suggest     further

               modifications and changes.          After the samples are

               finally   approved,      commercial    production      of    the

               interiors begins.

4.5. The assessee is involved in stages c) and d) alone.                      In

other words, the other stages in the provision of design and

engineering services by the Lear Group to its customers are

performed by the AEs independent of the assessee's help. To

put it simply, whereas the group companies understand the

total        requirements/specifications      of     the   customer        and

conceptualise the designs, the assessee, based on such

specifications, prepares the designs, tests and simulates to

ensure the proper functioning of the product when all its

components would be assembled.                   The work done by the

assessee goes back to the AE, who then gets such designs

approved from the final customers and, thereafter, prototypes

are made as per the designs which are tested for functionality

and then approved by the customer. Once the prototypes are

                                                 ITA No.5612/Del/2011

approved, the AEs get manufactured tools and moulds for the

purposes of manufacturing components as per the designs

finally approved by the customer. Such tools and moulds are

then approved by the customers and, thereafter, the actual

manufacturing starts. Thus, it can be seen that in the overall

framework of designs and engineering of components, the

assessee's role is limited to preparing software for designs as

per the specifications given by its AE and then testing and

simulating the work done by it before handing over such

software to its AEs.   To put it simply, the assessee is simply

engaged in providing software development services to its AE,

which work ends before the approval of designs by the final

customers for manufacturing at a later stage. With the above

idea of the nature of activity carried out by the assessee under

this segment, now, let us compare the companies chosen by

the TPO as to their comparability.

4.6. At the very beginning of venturing to make comparison of

the functional profile of the assessee with the comparable

companies, the ld. AR pointed out that the Tribunal considered

an identical case in Toluna India Pvt. Ltd. Vs. ACIT (ITA

No.5645/Del/2011).     He contended that the Tribunal vide its

                                                    ITA No.5612/Del/2011

order dated 26.08.2014, examined the comparability of all the

companies in question and then took decision as to their

comparability or otherwise. It was submitted that the TPO in

that case also chose exactly the same companies as were

chosen for the assessee and further the assessment year in

both is also the same. It was, therefore, prayed by the ld. AR

that the decision taken by the Tribunal in the case of Toluna

India Pvt. Ltd., be applied to the facts of the instant case as


4.7. The ld. DR opposed this contention by stating that Toluna

India Pvt. Ltd., is engaged in a different activity and its model of

remuneration is also different.    It was submitted that Toluna

India Pvt. Ltd., is both a service provider and also a software


4.8.    It is apparent from the order passed in the case of Toluna

India Pvt. Ltd. (supra) that the assessee therein was engaged in

the business of software development and also providing

software related services to Greenfield Group. That assessee

undertook provision of contract IT services to its AEs and was

compensated on cost plus 15%.           The tribunal found that

assessee to be both a software related service provider and

                                                 ITA No.5612/Del/2011

also a software developer. Due to common pool of the revenues

of that assessee and getting compensated uniformly at cost

plus 15%, the tribunal held that : `the companies engaged

either in software development or providing software service or

doing both, are functionally comparable to the assessee.'

4.9.   When we turn to the facts of the instant case, we find

that the TPO has classified the assessee, and rightly so, as

providing software development services. In our considered

opinion, the model of remuneration cannot be decisive of the

nature of activities carried out by the assessee. The fact that

the assessee in question has been compensated at an hourly

rate, and remuneration in the case of Toluna (supra) is at cost

plus 15%, cannot make them functionally different on this

score. When we keep the fine distinction between the software

related services and software development services in mind, it

becomes noticeable that the scope of the activity of Toluna is

wider than that of the assessee inasmuch as Toluna India Pvt.

Ltd., is both a software related service provider and also a

software developer. On the other hand, the assessee is only

engaged in providing software development services.           Seen

from that angle, it becomes manifest that the activity done by

                                                     ITA No.5612/Del/2011

the assessee is a part of the activities carried on by Toluna

India Pvt. Ltd. If a particular case is held to be not comparable

to Toluna India Pvt. Ltd., that case would be incomparable to

the assessee also unless it is shown that such comparable was

engaged either in providing exclusive software related services

or both software related services and software development

services jointly, which are different from simple software

development services provided by the assessee.              No such

distinction has been brought to our notice by the ld. DR in

respect of the companies challenged by the assessee as not

comparable.       In view of the above discussion, we find no

hesitation   in    holding   that   in   the   present   facts     and

circumstances, the companies which have been considered as

incomparable to Toluna India Pvt. Ltd. (supra), cannot be

considered as comparable to the assessee as well.

4.10. It is noticed that the ld. AR has challenged the inclusion

of 14 companies.      When we consider the Tribunal order in the

case of Toluna India Pvt. Ltd. (supra),        the comparability or

otherwise of the such companies can be summarised as under:-

                                                          ITA No.5612/Del/2011

      Sl.No.              Name of the company                Whether held
                                                             to be
      1.       Avani Cimcon Technologies Ltd.                Yes
      2.       Celestial Labs Ltd.                           No
      3.       E-Zest Solutions Ltd.                         Yes
      4.       Flextronics Software Systems Ltd. (Seg.)      No
      5.       Infosys Technologies Ltd.                     No
      6.       Ishir Infotech Ltd.                           Yes
      7.       KALS Information Systems Ltd. (Seg.)          No
      8.       Lucid Software Ltd.                           No
      9.       Megasoft Ltd.                                 No
      10.      Persistent Systems Ltd.                       No
      11.      Sasken Communication                          No
      12.      Tata Elxi Ltd. (Seg.)                         No
      13.      Thirdware Solutions Ltd.                      Yes
      14.      Wipro Ltd. (Seg.)                             No

4.11. Following the order in the case of Toluna India (supra),

we hold that the companies listed at Sl. Nos. 1, 3, 6 and 13 are

comparable, while the others are not. In the final analysis, we

set aside the impugned order on this issue and send the matter

back to the file of TPO/AO for the determination of the ALP of

the international transaction under IEC segment afresh in the

light of our above directions.

                                                      ITA No.5612/Del/2011

5.     In the result, the appeal is allowed for statistical purposes.

       Order pronounced in the open Court on 22/12/2014.

            Sd/-                                       Sd/-

 (GEORGE GEORGE K.)                              (R. S. SYAL)
   JUDICIAL MEMBER                           ACCOUNTANT MEMBER

Dated: 22 /12/2014


Copy forwarded to:

1.   Appellant
2.   Respondent
3.   CIT
4.   CIT(Appeals)
5.   DR: ITAT

                                             ASSISTANT REGISTRAR

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