IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `I' NEW DELHI
BEFORE SHRI R. S. SYAL, AM AND SHRI GEORGE GEORGE.K., JM
5612/Del/2011
/Del/2011
I.T.A .No. 5612/Del/201
2007-08
Assessment Year : 2007-
Lear Automotive India P. Ltd. Vs. ACIT
E-25, 26, 27, Bhosari MIDC, Circle 4(1),
Pune-411026. New Delhi.
AAACL1978K
PAN: AAACL1978K
(Appellant) (Respondent)
Assessee by : Shri Rohit Tiwari, CA &
Shri Anubhav Rastogi, Advocate.
Revenue by : Shri Peeyush Jain, CIT, DR &
Shri Vivek Kumar, Sr. DR
ORDER
PER R. S. SYAL, AM :
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
enterprises'.
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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
well.
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
developer.
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
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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
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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:-
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ITA No.5612/Del/2011
Sl.No. Name of the company Whether held
to be
Comparable.
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.
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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/-
K.)
(GEORGE GEORGE K.) (R. S. SYAL)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 22 /12/2014
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
REGISTRAR
ASSISTANT REGISTRAR
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