AVO CARBON INDIA PRIVATE LIMITED,CHENNAI V. AO CORPORATE CIRCLE 1(1), CHENNAI

ITTPA 82/CHNY/2024

AI Insights

The case revolves around an appeal by M/s. AVO Carbon India Private Limited against the order of the Assessing Officer, which was confirmed by the Dispute Resolution Panel (DRP), proposing an upward adjustment of Rs.7,25,09,110/- related to management service charges. The Tribunal noted that the management services were integral to the business operations of the assessee and had been consistently treated as at arm's length in previous years. The Tribunal found that the revenue's inconsistent approach over the years lacked justification and violated the principles of consistency. The Tribunal also referenced previous decisions in similar cases involving the same assessee, where similar adjustments were not upheld, thereby setting a precedent for the current case.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 315519 (ITAT-CHENNAI)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 14-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: misc
• Other Referred Cases: Flakt (India) Ltd. V/s DCIT, Bombardier Transportation India Pvt. Ltd. V/s DCIT, Gem Plus India Pvt. Ltd. V/s ACIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASSESSEE; RAISED VARIOUS ARGUMENTS; V SREENIVASAN
• Assessee Lawyers: S.P.CHIDAMBARAM
• Keywords: Set aside; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

"Page - 1 - of 12 आयकर अपीलीय अधिकरण, ’डी’ न्यायपीठ, चेन्नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI माननीय श्री मनु क ुमार धिरर ,न्याधयक सदस्य एवं माननीय श्री अमिताभ शुक्ला, लेखा सदस्य क े सिक्ष BEFORE HON’BLE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND HON’BLE SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.82/Chny/2024 Assessment Years: 2021-22 M/s.AVO Carbon India Private Limited, No.25 A/2 Dairy Plant Road, Sidco Estate, Ambattur, Chennai-600 098. [PAN: AABCM8697F] The Assessing Officer, Corporate Circle-1(1), Chennai. (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Assessee by : Shri S.P.Chidambaram, Advocate प्रत्यर्थी की ओर से /Revenue by : Shri AR V Sreenivasan, CIT सुनवाई की तारीख/Date of Hearing : 08.05.2025 घोषणा की तारीख /Date of Pronouncement : 14.05.2025 आदेश / O R D E R PER AMITABH SHUKLA, A.M : This appeal is filed by the assessee against the order bearing DIN & Order No.ITBA / AST / S / 143(3) / 2024-25 / 1068596806(1) dated 12.09.2024 of the Learned Assessing Officer for the assessment years 2021-22 passed in compliance to directions of Dispute Resolution Panel- 2, Bengaluru vide order dated 20.08.2024. 2.0 The only issue raised in the present appeal through its grounds of appeal are regarded the action of Ld.TPO in proposing an upward adjustment of Rs.7,25,09,110/- . The learned counsel for the assessee submitted that downward adjustment made by the ld.TPO and its IT(TP)A No.82 /Chny/2024 Page - 2 - of 12 confirmation by Ld.DRP, determining ALP of management services as Nil is arbitrary and without any basis. Brief factual matrix of this case is that the assessee company is a wholly owned subsidiary of AVO Carbon Holding LLC, USA. The assessee company is engaged in the business of manufacture and supply of carbon brushes to both domestic and overseas customers which are used in automotive, power tool, and home appliances. The assessee’s customer include manufacturers of automobile / automobile ancillaries and also manufacturers of electronic and household appliances. The Ld.TPO accepted assessee’s adoption of TNMM method as the most appropriate method for determination of the ALP. All the international transactions were accepted as at arm’s length except the payment of management charges. The TPO separately benchmarked the payment of management charges considering other method as the most appropriate method. The learned counsel submitted that management charges included purchase and procurement related charges, manufacture, research and development related charges, marketing and sales related charges, finance & general administration related charges. In response to queries of Ld.TPO, as to why the ALP for the impugned management service charges be not treated as Nil, the appellant assessee had provided detailed submissions along with evidences deemed necessary for the purpose. The Ld.TPO rejected the assessee’s contentions and made the impugned additions. The Ld.DRP IT(TP)A No.82 /Chny/2024 Page - 3 - of 12 proceeded to confirm the finding of the Ld.TPO holding in para 2.7 of its order that the assessee has failed to produce any credible evidences regarding any expenditure being incurred by the AEs on behalf of the assessee. The learned counsel drew our attention to the fact that that it avails management support services from its holding company for efficient running of its business. It was submitted that a mark up of 5% has been placed qua, these services and that the same is applicable to all group entities. The Ld.AR argued that it is significant to note that the impugned support services enables efficient running of the business and to manage day-to-day activities, effective trouble shooting etc. These services are totally integrated to the business operations of the appellant and hence, only group company, in know of true business needs, would be in a position to provide the same. Also, given the confidentiality involved with respect to the technology and business data, these services cannot be availed from third parties. The learned counsel provided a tabular chart pertaining to AY 2011-12 to 2013-14, 2015-16 to 2017-18 and the present year i.e., and submitted that the stand of revenue has been consistently inconsistent in the treatment of the impugned management service charges. It was argued that expenses have been randomly allowed and disallowed without any apparent justification. The ld counsel further placed reliance upon the decision of co-ordinate Bench of this Tribunal in assessee’s own case for IT(TP)A No.82 /Chny/2024 Page - 4 - of 12 AY 2012-13 and 2015-16 delivered by ITA No. 2787/Chny/2016 dated 03.01.2022 and IT(TP) No.84/Chny/2019 dated 27.06.2024 respectively passed in its favour. Description of management charges AY 2011-12 Amt .Rs AY 2012-13 Amt .Rs AY 2013-14 Amt .Rs AY 2015-16 Amt .Rs AY 2016-17 Amt .Rs AY 2017-18 Amt .Rs AY 2021-22 Amt .Rs Manufacturing 69,21,332 Sales & Marketing 1,22,23,710 1,44,75,571 1,43,30,393 X 1,32,02,578 X 1,34,21,062 2,20,58,870 X 2,56,36,953 Manufacturing & Research & development 1,02,24,500 1,21,83,288 1,35,41,638 X 1,70,33,626 1,51,80,685 2,56,53,807 X 3,11,66,676 Purchase X 42,75,214 36,76,588 16,63,231 X 22,64,170 X 18,36,172 X 28,12,355 X 31,46,841 Finance & General Administration X 47,81,715 X 89,18,152 X 71,36,454 X 1,07,25,656 X 96,89,132 X 95,13,088 X 1,25,58,640 AY 2014-15, 2018-19 to 2021-21 not referred to TPO X Disallowed by TPO 3.0 Per contra, the Ld.DR relied upon the order of authorities below. 4.0 We have heard rival submissions in the light of materials available on records. The management services which have been disallowed by the Ld.TPO and his decision affirmed by the Ld.DRP are integrally related to conduct of any business activity of the type undertaken by the assessee. It is not a case of any service or activity devised by the assessee which is one of its type , over which any doubts can be caste. The mark up of 5% placed by assessee and its group companies also appears to be more or less reasonable. It has also been noted that the assessee has not separately booked any expenditure of the type in its IT(TP)A No.82 /Chny/2024 Page - 5 - of 12 financials. The very fact that the revenue has been selectively allowing and not allowing the impugned management service expenses has also been not found to be an exercise which cannot be approved. Principles of Consistency demand that same treatment is to be given, over the years to a set of transaction if facts are same . The Ld.DR could not defend the action of revenue in past years qua, inconsistency in its approach. 5.0 We have also noted that a co-ordinate Bench of this Tribunal in assessee’s own case for AY 2012-13 ITA No. 2787/Chny/2016 dated 03.01.2022 have ruled as under:- “…..2. This appeal arises out of final assessment order dated 28- 07-2016 passed by learned Assessing Officer (AO) u/s 143(3) r.w.s. 144(C) r.w.s. 2CA of the Act pursuant to the directions of learned Dispute Resolution Panel-2, Bangalore u/s. 144C(5) dated 30-05-2016. Though the assessee has raised multiple grounds of appeal, however, in sum and substance, the assessee is aggrieved by downward adjustment of Rs.89.18 Lacs to the value of international Transaction of Finance & General administration related service charges. 3. The Ld. AR, appearing for assessee, raised various arguments to assail the adjustments made by lower authorities and for the same, relied on various judicial pronouncements, the copies of which have been placed on record. The Ld. DR, on the other hand, supported the adjustment so made. Having heard rival submissions and after considering the orders of lower authorities, our adjudication to the subject matter of appeal would be as under. 4.1 The material facts are that the assessee being resident corporate assessee is stated to be engaged in manufacturing of carbon brushes. Since the assessee entered into various international transaction with its Associated Enterprises (AE), the same were referred to Ld. Transfer Pricing Officer 1(1), Chennai [TPO] u/s. 92CA(1) of the Act for determination of Arm’s Length IT(TP)A No.82 /Chny/2024 Page - 6 - of 12 Price (ALP). These transactions are detailed in para-4 of Ld. TPO’s order. The assessee, in its Transfer Pricing (TP) study report, aggregated all these transactions and benchmarked the same using entity level Transactional Net Margin Method (TNMM). Since assessee’s margin was stated to be higher than the mean margin of comparable entities, no TP adjustment was proposed by the assessee. 4.2 One of the transactions carried out by the assessee was payment of Rs.392.53 Lacs paid by the assessee to one of its AE i.e. M/s AVO Carbon Holdings, LLC to procure management services. These services include payment of Rs.89.12 Lacs towards finance and general management / administration services. The services were availed by the assessee under an agreement with its AE. The Ld. TPO proposed to benchmark this transaction separately using Comparable Uncontrolled Price (CUP) method which was opposed by the assessee on the ground that in the absence of comparable data, CUP method could not be applied. Further, these transactions were inter- related and inter-linked and related to manufacturing operations undertaken by the assessee. Therefore, the determination of ALP on TNMM would be most suitable method. However, the same could not convince Ld. TPO. The Ld. TPO also noted that the assessee was required to make payment prior to its receiving of services and the need to avail such service may not arise during the normal course of business of the assessee. Though the other services arising out of same agreement translated into certain benefits to the assessee, however, the assessee could not submit separate evidences as proof of receipt of finance, general management / administration services and therefore, it could not substantiate that the amount paid for these services were commensurate with the services received. Further, the payment of these services reflected substantial increase from Rs.47.81 Lacs in AY 2011-12 to Rs.89.18 Lacs during this year. Also, these services were in the nature of stewardship services. Finally the ALP of this transaction was determined to be Nil and TP adjustment of Rs.89.18 Lacs was proposed which was incorporated by Ld. AO in the draft assessment order. 5. Though the assessee raised objection before Ld. DRP, however, the same could not convince Ld. DRP. The Ld. DRP, vide para-2.6 of the direction, held that the nature of services was IT(TP)A No.82 /Chny/2024 Page - 7 - of 12 part of shareholder’s activity which do not justify any charges to be paid to the recipient. Accordingly, ALP was rightly determined as Nil. Pursuant to these directions, final assessment order was passed by Ld. AO incorporating this adjustment. Aggrieved, the assessee is in further appeal before us. 6. Going by the factual matrix as enumerated in preceding paragraphs, it could be seen that the assessee has availed bundle of services from its AE and made payment pursuant to the terms of the agreement. These payments are recurring in nature and are determined by applying specific allocation keys. However, Ld. TPO, while accepting that all the other services benefitted the assessee, termed the services of finance / general management to be in the nature of stewardship services and alleged that the assessee did not submit any evidence of the receipt of services disregarding the fact that these services were emanating from the same agreement. The rendering of services was duly evidenced by the agreement as well as debit notes issued against the assessee. The copies of email / correspondences to support the receipt of services were duly furnished (43 to 88 of paper book). Another observation of Ld. TPO is that the assessee may not be requiring these services in the normal course of business. The same, in our opinion, is not correct approach since the role of Ld. TPO was limited to determine the ALP of the transactions and not to adjudge the same at the threshold of business needs / requirements of the assessee. Also, though Ld. TPO observed that the transaction was to be benchmarked applying CUP method, however, no effort has been made to determine the ALP of the transaction using CUP method. Simply determining the ALP to be nil on the basis that the services were not required to be availed and not determining ALP without applying any of the prescribed method is not in accordance with statutory mandate. The TP provisions mandate application of any of the prescribed method to arrive at Arm’s Length Price of the international transactions. Our view is duly fortified by the decision of this Tribunal in Flakt (India) Ltd. V/s DCIT (ITA No.1032/Mds/2014) wherein it was held that in the absence of any comparison of the transaction with transaction carried out in uncontrolled market, Ld. TPO could not independently come to conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The estimation of the services rendered and costs IT(TP)A No.82 /Chny/2024 Page - 8 - of 12 of such service was outside the scope of transfer pricing adjustment. The Ld. CIT-DR has referred to the decision of Delhi Tribunal in Bombardier Transportation India Pvt. Ltd. V/s DCIT hich is factually distinguishable since in that case the assessee could not file sufficient documentary evidences and the djustment was partially confirmed. Similarly, the case of Gem Plus India Pvt. Ltd. V/s ACIT (ITA No.352/Bang/2009 dated 21-10-2010), as referred to by Ld. CIT-DR is factually distinguishable since in that case Ld. TPO has observed that the terms prescribed in the agreement in respect of payment to be made by the assessee company was independent of the nature and volume of services. These are not the findings here. In fact, all the other services availed by the assessee under the agreement has been accepted to be at Arm’s Length Price. 7. Lastly, it is an uncontroverted fact that the assessee has paid for these services in earlier years also which has been accepted by the revenue and this is the first year in which such an adjustment has been proposed. Therefore, the value of impugned transactions, in our considered opinion, could not be taken to be nil in this year. 8. Keeping in view all the above factors, we would hold that the TP adjustment as made by Ld. AO in the final assessment order could not be upheld in the eyes of law. By deleting the same, we allow the appeal….” 6.0 We have further noted that another co-ordinate Bench of this Tribunal in assessee’s own case for 2015-16 delivered by ITA No. IT(TP) No.84/Chny/2019 dated 27.06.2024 :- “……2. The only issue emanates for consideration is that the Assessing Officer/DRP/TPO erred in disallowing the payment made towards management services rendered by the Associated Enterprise (AE) in the assessment year 2015-16. 3. The ld. AR Shri S.P. Chidambaram, Advocate submits that the Assessing Officer/TPO failed to take cognizance of the payment made towards purchase related management services which were accepted to be at arm’s length price [ALP] by the TPO for the assessment years 2012-13 and 2013-14. However, the Assessing Officer/TPO failed to take cognizance of the payment made towards research and development IT(TP)A No.82 /Chny/2024 Page - 9 - of 12 related management services which were accepted to be at ALP by the TPO for AY 2011-12, 2012-13 and 2013-14 and also in subsequent assessment year 2016-17. The ld. AR drew our attention to the order of the TPO and argued that on the same issues, the Assessing Officer/TPO accepted the payment made towards management services and no disallowance made thereon. Further, he drew our attention to the order of this Tribunal for AY 2012-13 in assessee’s own case and submits that similar issue basing on identical facts, the Coordinate Bench of this Tribunal deleted the addition made by the Assessing Officer on account of payment made towards management services rendered by the AE. 4. The ld. DR Shri A. Sasikumar, CIT did not dispute the same. On perusal of the said order of the Coordinate Bench of this Tribunal, we find that the issue decided therein are similar to the case in hand. For ready reference, relevant portions are reproduced herein below: 4.1 The material facts are that the assessee being resident corporate assessee is stated to be engaged in manufacturing of carbon brushes. Since the assessee entered into various international transaction with its Associated Enterprises (AE), the same were referred to Ld. Transfer Pricing Officer 1(1), Chennai [TPO] u/s. 92CA(1) of the Act for determination of Arm’s Length Price (ALP). These transactions are detailed in para-4 of Ld. TPO’s order. The assessee, in its Transfer Pricing (TP) study report, aggregated all these transactions and benchmarked the same using entity level Transactional Net Margin Method (TNMM). Since assessee’s margin was stated to be higher than the mean margin of comparables entities, no TP adjustment was proposed by the assessee. 4.2 One of the transactions carried out by the assessee was payment of Rs.392.53 Lacs paid by the assessee to one of its AE i.e. M/s AVO Carbon Holdings, LLC to procure management services. These services include payment of Rs.89.12 Lacs towards finance and general management/ administration services. The services were availed by the assessee under an agreement with its AE. The Ld. TPO proposed to benchmark this transaction separately using Comparable Uncontrolled Price (CUP) method which was opposed by the assessee on the ground that in the absence of comparable data, CUP method could not be applied. Further, these transactions were inter-related and inter-linked and related to manufacturing operations undertaken by the assessee. Therefore, the determination of ALP on TNMM would be most suitable method. However, the same could not convince Ld. TPO. The Ld. TPO also noted that the assessee was required to make payment prior to its receiving of services and the need to avail such service may not arise during the normal course of business of the assessee. Though the other services arising out of same agreement translated into certain benefits to the assessee, however, the assessee could not submit separate evidences as proof of receipt of finance, general management /administration services and therefore, it could not substantiate that the amount paid for these services were commensurate with the services received. Further, the payment of IT(TP)A No.82 /Chny/2024 Page - 10 - of 12 these services reflected substantial increase from Rs.47.81 Lacs in AY 2011- 12 to Rs.89.18 Lacs during this year. Also, these services were in the nature of stewardship services. Finally the ALP of this transaction was determined to be Nil and TP adjustment of Rs.89.18 Lacs was proposed which was incorporated by Ld. AO in the draft assessment order. 5. Though the assessee raised objection before Ld. DRP, however, the same could not convince Ld. DRP. The Ld. DRP, vide para-2.6 of the direction, held that the nature of services was part of shareholder’s activity which do not justify any charges to be paid to the recipient. Accordingly, ALP was rightly determined as Nil. Pursuant to these directions, final assessment order was passed by Ld. AO incorporating this adjustment. Aggrieved, the assessee is in further appeal before us. 6. Going by the factual matrix as enumerated in preceding paragraphs, it could be seen that the assessee has availed bundle of services from its AE and made payment pursuant to the terms of the agreement. These payments are recurring in nature and are determined by applying specific allocation keys. However, Ld. TPO, while accepting that all the other services benefitted the assessee, termed the services of finance/general management to be in the nature of stewardship services and alleged that the assessee did not submit any evidence of the receipt of services disregarding the fact that these services were emanating from the same agreement. The rendering of services was duly evidenced by the agreement as well as debit notes issued against the assessee. The copies of email / correspondences to support the receipt of services were duly furnished (43 to 88 of paper book). Another observation of Ld. TPO is that the assessee may not be requiring these services in the normal course of business. The same, in our opinion, is not correct approach since the role of Ld. TPO was limited to determine the ALP of the transactions and not to adjudge the same at the threshold of business needs / requirements of the assessee. Also, though Ld. TPO observed that the transaction was to be benchmarked applying CUP method, however, no effort has been made to determine the ALP of the transaction using CUP method. Simply determining the ALP to be nil on the basis that the services were not required to be availed and not determining ALP without applying any of the prescribed method is not in accordance with statutory mandate. The TP provisions mandate application of any of the prescribed method to arrive at Arm’s Length Price of the international transactions. Our view is duly fortified by the decision of this Tribunal in Flakt (India) Ltd. V/s DCIT (ITA No.1032/Mds/2014) wherein it was held that in the absence of any comparison of the transaction with transaction carried out in uncontrolled market, Ld. TPO could not independently come to conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The estimation of the services rendered and costs of such service was outside the scope of transfer pricing adjustment. The Ld. CIT-DR has referred to the decision of Delhi Tribunal in Bombardier Transportation India IT(TP)A No.82 /Chny/2024 Page - 11 - of 12 Pvt. Ltd. V/s DCIT (ITA No.1626/Del/2015 dated 04-11-2015) which is factually distinguishable since in that case the assessee could not file sufficient documentary evidences and the adjustment was partially confirmed. Similarly, the case of Gem Plus India Pvt. Ltd. V/s ACIT (ITA No.352/Bang/2009 dated 21-10-2010), as referred to by Ld. CIT-DR is factually distinguishable since in that case Ld. TPO has observed that the terms prescribed in the agreement in respect of payment to be made by the assessee company was independent of the nature and volume of services. These are not the findings here. In fact, all the other services availed by the assessee under the agreement has been accepted to be at Arm’s Length Price. 7. Lastly, it is an uncontroverted fact that the assessee has paid for these services in earlier years also which has been accepted by the revenue and this is the first year in which such an adjustment has been proposed. Therefore, the value of impugned transactions, in our considered opinion, could not be taken to be nil in this year. 5. On examination of the relevant portion as reproduced above, we find that the issues raised therein in the AY 2012-13 are similar to the issue raised in the appeal for the year under consideration. The Coordinate Bench discussed the issue in detail, particularly vide para 7 of the order, it was observed that the assessee has paid for the services in the earlier years, which were accepted by the Revenue by holding that the Assessing Officer/DRP/TPO could not be taken as NIL on account of management services charges, which supports the submissions of the ld. AR in accepting the ALP determined by the assessee. Therefore, in view of the facts and circumstances of the case and findings of the Coordinate Bench, we hold that the downward adjustment as made by the Assessing Officer in the final assessment order dated 17.10.2019 passed under section 143(3) r.w.s. 144C(13) of the Act is not justified. Thus, the grounds raised by the assessee are allowed…..” 7.0 We have noted that rival parties have concurred that there has been no distinguishment of facts of the present case viz a viz those available in AY 2012-13 and AY 2015-16 for which this Tribunal has accorded relief to the assessee. Accordingly, in adherence to the principles of consistency as well as in respectful compliance to the decision of Hon’ble co-ordinate Benches of this Tribunal in assessee’s own case discussed supra, we set aside the order of lower authorities IT(TP)A No.82 /Chny/2024 Page - 12 - of 12 and direct the Ld.AO to delete the impugned addition of Rs.7,25,09,110/- on account of downward adjustment of payment of management fees . All the grounds of appeal raised by the assessee on this issue are therefore allowed. 8.0 In the result, the appeal of the assessee is allowed. Order pronounced on 14th , May 2025 at Chennai. Sd/- (मनु क ुमार धिरर) (MANU KUMAR GIRI) न्याधयक सदस्य / Judicial Member Sd/- (अधमताभ शुक्ला) (AMITABH SHUKLA) लेखा सदस्य /Accountant Member चेन्नई/Chennai, धदनांक/Dated: 14th , May 2025. KB/- आदेश की प्रतितिति अग्रेतिि/Copy to: 1. अिीिार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai 4. तिभागीय प्रतितिति/DR 5. गार्ड फाईि/GF "